Prospectus filed pursuant to Rule 424(b)(4)
Registration Number 333-70579
- -------- 1,300,000 SHARES
- --------
(CREE logo)
- --------
- --------
- -------- COMMON STOCK
- --------
$39.375 PER SHARE
- -------- ------------------------------------------------------------------
Cree Research, Inc. is offering 1,300,000 shares of common stock
with this prospectus. This is a firm commitment underwriting.
- --------
- -------- The common stock is listed on the Nasdaq National Market under the
symbol "CREE." On February 10, 1999, the last reported sale price
of the common stock on the Nasdaq National Market was $39.625 per
- -------- share.
- -------- INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
- --------
- -------- <TABLE>
<CAPTION>
- -------- PER SHARE TOTAL
----------- --------------
- -------- <S> <C> <C>
Price to the public ........... $ 39.375 $51,187,500
- -------- Underwriting discount ......... $ 2.070 $ 2,691,000
Proceeds to Cree .............. $ 37.305 $48,496,500
- -------- </TABLE>
- -------- Cree has granted an over-allotment option to the underwriters.
Under this option, the underwriters may elect to purchase a maximum
of 195,000 additional shares from Cree within 30 days following the
date of this prospectus to cover over-allotments.
- -------- -------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
- -------- SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
- -------- ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------- CIBC OPPENHEIMER
- --------
PRUDENTIAL SECURITIES
- --------
MORGAN KEEGAN & COMPANY, INC.
- --------
- -------- The date of this Prospectus is February 10, 1999
<PAGE>
Following the prospectus cover page are color photos of certain of the Company's
products:
Blue and green LEDs
Silicon carbide (SiC) wafer
Gemstone crystal
Microwave device
Utility substation (Photo courtesy of Carolina Power & Light)
Blue laser beam
In the center of the photo layout is the Cree logo over the title "Existing and
Planned Products"
Beside or beneath each photo is the following description:
LEDS
Cree has created high brightness blue and green LEDs through the
combination of SiC and GaN.
SILICON CARBIDE WAFERS
Cree is the leading worldwide supplier of SiC wafers used by customers
in research and development programs.
GEMSTONE APPLICATIONS
Cree manufactures near colorless SiC with properties similar to diamond
for use in unique gemstones.
MICROWAVE*
Cree is developing devices for use in microwave applications, such as
wireless base station transmitters.
POWER SEMICONDUCTORS*
Cree is developing power semiconductor devices for applications, such as
motor control and high voltage power transmission.
(Photo Courtesy of Carolina Power & Light)
LASERS*
Cree is developing blue laser diodes designed to increase optical
storage capability.
*Currently under development
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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Forward-Looking Statements ........................................................... 3
Prospectus Summary ................................................................... 4
Risk Factors ......................................................................... 6
Use of Proceeds ...................................................................... 12
Dividend Policy ...................................................................... 12
Price Range of Common Stock .......................................................... 13
Capitalization ....................................................................... 14
Selected Consolidated Financial Data ................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Business ............................................................................. 25
Management ........................................................................... 34
Principal Shareholders ............................................................... 36
Certain Transactions ................................................................. 38
Underwriting ......................................................................... 39
Legal Matters ........................................................................ 41
Experts .............................................................................. 41
Other Matters ........................................................................ 41
Where You Can Find More Information .................................................. 41
Index to Financial Statements ........................................................ F-1
</TABLE>
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As used in this prospectus, the terms "we," "us," "our," the "Company" and
"Cree" mean Cree Research, Inc. and its subsidiaries (unless the context
indicates a different meaning), and the term "common stock" means the Company's
common stock, $0.005 par value per share. Unless otherwise stated, all
information contained in this prospectus assumes no exercise of the
over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about February 17, 1999, against payment in immediately available funds.
-------------------------
FORWARD-LOOKING STATEMENTS
Information set forth in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contains various "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act, which represent our
judgment concerning the future and are subject to risks and uncertainties that
could cause our actual operating results and financial positions to differ
materially. Forward-looking statements are typically identified by the use of
terms such as "may," "will," "expect," "anticipate," "estimate" and similar
words, although some forward-looking statements are expressed differently. Our
actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including fluctuations
in our operating results, production yields in our manufacturing processes,
whether we can produce commercial quantities of high brightness blue and green
LEDs, our dependence on a few customers, whether we can manage our growth
effectively, assertion of intellectual property rights by others, adverse
economic conditions and insufficient capital resources. These and other factors
that could cause actual results to differ materially from such forward-looking
statements are set forth under the caption "Risk Factors" and elsewhere in this
prospectus.
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PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR FINANCIAL STATEMENTS AND ACCOMPANYING NOTES THAT APPEAR
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from silicon carbide, or SiC. We use our
proprietary technology to make enabling compound semiconductors such as blue
and green light emitting diodes or LEDs, SiC crystals used in the production of
unique gemstones and SiC wafers that are sold for research and development. We
have new product initiatives based on our expertise in SiC, including microwave
transistors for use in wireless base stations and radar, blue laser diodes for
optical storage applications and high power devices for power conditioning and
switching.
Our blue and green LEDs are sold to customers who package them for use in
applications such as backlighting for automotive dashboards and liquid crystal
displays, including wireless handsets. Other applications include indoor and
outdoor electronic displays, such as video replay boards in indoor arenas.
Additionally, we recently began shipping LEDs for use in traffic signals and
miniature lighting. We have developed several generations of blue LED products,
including a more robust conductive buffer chip that is easier to build into
lamps and has a low unit price. Strategies Unlimited, an industry research
firm, has estimated that the market size for LEDs (all colors) was
approximately $1.8 billion in 1997 and has forecast that the blue and green LED
portion of the market will increase from approximately $204 million in 1998 to
approximately $430 million in 2001.
We believe that for certain applications SiC-based compound semiconductor
devices offer significant advantages over other semiconductor materials such as
silicon and gallium arsenide. In particular, the properties of SiC make it an
excellent material for extending existing semiconductor device technology where
high power, high temperature or short wavelengths are important for
performance. For example, SiC enables the manufacture of blue and green LEDs in
an easier to use, industry standard structure. SiC also permits a smaller LED
chip size that we believe is less expensive to produce than LEDs made using
other materials. In addition, SiC-based microwave transistors can operate at
significantly higher power levels than existing silicon or gallium
arsenide-based devices. This characteristic will allow wireless systems to use
fewer transistors per base station with less complex circuitry, which should
result in a lower system cost.
Many of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through our proprietary technology and over 10 years of development
and manufacturing experience, we have succeeded in overcoming many difficulties
in processing SiC for commercial use.
Our objective is to continue to develop SiC materials and device technology
with low unit costs. We are using our materials and process technology to
develop new microwave, power and laser diode products while continuing to
enhance our LEDs, SiC wafers and gemstone crystals. We have increased the
performance and reduced the cost of our LED chips over the last several years
by decreasing chip size, increasing wafer diameter and enhancing our epitaxial
film deposition (wafer coating) and fabrication processes.
Our principal executive offices are located at 4600 Silicon Drive, Durham,
North Carolina 27703. Our telephone number is (919) 313-5300.
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THE OFFERING
Common stock offered by Cree........................ 1,300,000 shares
Common stock to be outstanding after the offering... 14,219,818 shares(1)
Use of proceeds..................................... To purchase additional
manufacturing equipment
and build out the
Company's principal
manufacturing facility,
to repay indebtedness,
for research and
development, and for
working capital and
general corporate
purposes.
Nasdaq National Market symbol....................... CREE
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 28, DECEMBER 28, DECEMBER 27,
1996 1997 1998 1997 1998
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<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue ......................... $15,057 $ 28,973 $ 42,531 $ 20,313 $ 26,317
Gross profit .......................... 3,568 9,878 14,552 6,696 12,273
Income (loss) from operations ......... (624) 3,112 8,145 3,401 7,111
Net income ............................ $ 243 $ 3,542 $ 6,275 $ 2,640 $ 5,217
======= ======== ======== ======== ========
Earnings per share:
Basic ............................... $ 0.02 $ 0.28 $ 0.49 $ 0.21 $ 0.41
======= ======== ======== ======== ========
Diluted ............................. $ 0.02 $ 0.27 $ 0.47 $ 0.20 $ 0.39
======= ======== ======== ======== ========
Shares used in per share calculation:
Basic ............................... 11,826 12,455 12,863 12,699 12,876
======= ======== ======== ======== ========
Diluted ............................. 12,615 13,126 13,493 13,522 13,541
======= ======== ======== ======== ========
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<TABLE>
<CAPTION>
DECEMBER 27, 1998
-----------------------------
ACTUAL AS ADJUSTED (2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $12,769 $50,616
Working capital ................................... 24,383 62,351
Total assets ...................................... 78,103 115,950
Long term debt, including current portion ......... 10,000 --
Shareholders' equity .............................. 59,989 107,836
</TABLE>
- -------------------
(1) Based on 12,919,818 shares of common stock outstanding on December 27,
1998. Excludes 1,984,547 shares of common stock reserved for issuance upon
the exercise of stock options and warrants outstanding at December 27,
1998, of which 88,821 shares were issued between December 27, 1998 and
February 10, 1999.
(2) Adjusted to give effect to the sale of 1,300,000 shares of common stock
offered by Cree in this offering at a public offering price of $39.375 per
share, and the application of the net proceeds from the sale of the
shares, after deducting the underwriting discount and estimated offering
expenses payable by Cree. See "Use of Proceeds."
5
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO INVEST
IN THE SHARES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US,
THAT WE CURRENTLY DEEM IMMATERIAL OR THAT ARE SIMILAR TO THOSE FACED BY OTHER
COMPANIES IN OUR INDUSTRY OR BUSINESS IN GENERAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY AND
ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS ALSO
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE RISKS
FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. PLEASE REFER TO
"FORWARD-LOOKING STATEMENTS" ON PAGE 3.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATE.
Although we have had significant revenue and earnings growth in recent
quarters, we may not be able to sustain these growth rates and we may
experience significant fluctuations in our revenue and earnings in the future.
Our operating results will depend on many factors, including the following:
o our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
o whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o demand for our products;
o demand for our customers' products;
o competition; and
o general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. If our future operating results are below the expectations of stock
market analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.
Our SiC products are manufactured using technologies that are highly complex.
Our customers incorporate our products into high volume applications such as
automotive dashboards, wireless handsets, full color video displays and
gemstones, and they insist that our products meet exact specifications for
quality, performance and reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including the
following:
o impurities in the materials used;
o contamination of the manufacturing environment;
o equipment failure, power outages or variations in the manufacturing
process;
o losses from broken wafers or other human error; and
o defects in packaging.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected. For this reason, we are
constantly trying to improve our yields.
In the past, we have experienced difficulties in achieving acceptable yields on
new products, which has adversely affected our operating results. We may
experience similar problems in the future and we cannot predict when they may
occur or their severity. These problems could significantly affect our future
operating results.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS BLUE AND
GREEN LEDS, OUR OPERATING RESULTS MAY SUFFER.
We are currently beginning the manufacture of commercial quantities of high
brightness blue and green LEDs, and as a result we have incurred certain fixed
costs. We believe that high volume production of these products will be
important to our future operating results. Achieving greater
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<PAGE>
volumes requires improved production yields for these products. Successful
production of these products is subject to a number of risks, including the
following:
o our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
o our ability to improve our yields and reduce the costs associated with the
manufacture of these products; and
o whether these products gain market acceptance.
Our inability to produce adequate quantities of our high brightness blue and
green products would have a material adverse effect on our business, results of
operations and financial condition.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include high power radio
frequency and microwave devices, power devices, blue laser diodes and high
temperature devices. The successful development and introduction of these
products depends on a number of factors, including the following:
o achievement of technology breakthroughs required to make commercially
viable devices;
o the accuracy of our predictions of market requirements and evolving
standards;
o acceptance of our new product designs;
o the availability of qualified development personnel;
o our timely completion of product designs and development;
o our ability to develop repeatable processes to manufacture new products in
sufficient quantities for commercial sales; and
o acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
WE DEPEND ON A FEW LARGE CUSTOMERS.
Historically, a substantial portion of our revenue has come from large
purchases by a small number of customers. We expect that trend to continue. For
example, for fiscal 1998 our top five customers accounted for 81% of our total
revenue. For the six months ended December 27, 1998, our top five customers
accounted for 79% of our total revenue. (These percentages consider sales to a
distributor as sales to one customer). Sales to Siemens AG during both periods
accounted for 40% of our total revenue. In addition, sales to C3 accounted for
11% of our total revenue in fiscal 1998 and 18% of our total revenue in the six
months ended December 27, 1998. Accordingly, our future operating results
depend on the success of our largest customers and on our success in selling
large quantities of our products to them.
The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.
In order to increase production at our new facility, we must add critical new
equipment, move existing equipment and complete the remaining phases of
building out the facility. We are in the process of completing this build-out
and expect to construct additional facilities in the future. Expansion
activities such as these are subject to a number of risks, including the
following:
o unforeseen environmental or engineering problems relating to existing or
new facilities;
o unavailability or late delivery of the advanced, and often customized,
equipment used in the production of our products;
o unavailability of funds necessary for expansion;
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o work stoppages and delays; and
o delays in bringing production equipment on-line.
These and other risks may affect the ultimate cost and timing of the build-out
of our existing facility, as well as the construction of new facilities, which
could adversely affect our business, results of operations and financial
condition.
THE ONGOING OPERATION OF OUR MANUFACTURING FACILITY IS CRITICAL TO OUR
BUSINESS.
In November 1997, we acquired our present principal facility in Durham, North
Carolina, which includes a total of 172,000 square feet. The ongoing operation
of this facility is crucial to our strategy of expanding our manufacturing
capacity to meet demand for our SiC products now and in the future.
We began commercial production of products from this facility in August 1998.
We expect that production from the facility will increase throughout the
remainder of fiscal 1999 and into fiscal 2000. A number of factors will affect
the successful operation of this facility and our business, including the
following:
o demand for our products;
o our production yields;
o our ability to generate revenues in amounts that cover the significant
fixed costs of operating our facility;
o our ability to hire, train and manage qualified production personnel; and
o our inability to use all or a significant portion of our facility for
prolonged periods of time for any reason -- for example, a fire or
explosion caused by our use of combustible chemicals and high temperatures
during certain of our manufacturing processes.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR RAPID GROWTH.
We are experiencing a period of significant growth that will continue to place
a great strain on our management and other resources. We have grown from 188
employees on December 31, 1996 to 297 employees on December 27, 1998 and from
revenues of $29.0 million for the fiscal year ended June 30, 1997 to $42.5
million for the fiscal year ended June 28, 1998. To manage our growth
effectively, we must continue to:
o implement and improve operational systems;
o maintain adequate physical plant, manufacturing facilities and equipment
to meet customer demand;
o add experienced senior level managers; and
o attract and retain qualified people with experience in engineering,
design, technical marketing and support.
We will spend substantial amounts of money in connection with our rapid growth
and may have additional unexpected costs. Our systems, procedures or controls
may not be adequate to support our operations, and we may not be able to expand
quickly enough to exploit potential market opportunities. Our future operating
results will also depend on expanding sales and marketing, research and
development, and administrative support. If we cannot attract qualified people
or manage growth effectively, our business, operating results and financial
condition could be adversely affected.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The market for our products is highly competitive. Although we believe our
SiC-based LEDs offer substantial advantages, competitors currently sell blue
and green LEDs made from sapphire wafers that are brighter than the high
brightness LEDs we currently produce. In addition, we believe that other firms
(including certain of our customers) may seek to enter the blue and green LED
market in the future. For example, Siemens AG and Shin-Etsu Handotai Co. Ltd.
license certain of our LED technology, which may facilitate their entrance into
our LED markets. The market for SiC wafers is also becoming competitive as
other firms have in recent years begun offering SiC wafer products or announced
plans to do so.
Also, other firms may develop new or enhanced products that are more effective
than any that we have developed or may develop. These firms may develop
technology that produces commercial products with characteristics similar to
SiC-based products, but at a lower cost. Many existing and potential
competitors have far greater financial, marketing and other resources than we
do. We believe that present and future competitors will
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aggressively pursue the development and sale of competing products. We also
expect significant competition for products we are currently developing, such
as those for use in microwave communications.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
WE RELY ON A FEW KEY SUPPLIERS.
We depend on a limited number of suppliers for certain raw materials,
components and equipment used in manufacturing our SiC products, including key
materials and equipment used in critical stages of our manufacturing processes.
We generally purchase these limited source items with purchase orders, and we
have no guaranteed supply arrangements with such suppliers. If we were to lose
such key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.
IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could
be adversely affected.
WE DEPEND HEAVILY ON KEY PERSONNEL.
Our success depends in part on keeping key technical and management personnel.
For example, some of the equipment used in the production of our products must
be modified before it is put to use and only a limited number of employees
possess the expertise needed to perform these modifications. Furthermore, the
number of individuals with experience in the production of SiC and related
products is limited, and our future success depends in part on retaining those
individuals who are already employees.
We must also continue to attract qualified personnel. The competition for
qualified personnel is intense, and the number of people with the experience
that we need is limited. We cannot be sure that we will be able to continue to
attract and retain other skilled personnel in the future.
LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based on patents exclusively licensed to
us by North Carolina State University, also known as N.C. State, and on patents
owned by us. The licensed patents give us rights to our SiC crystal growth
process. The expiration dates on the U.S. patents we license from N.C. State
run from 2007 to 2009. We also own 43 U.S. patents relating to various aspects
of our technology and have other patent applications pending. The issued U.S.
patents we own expire between 2008 and 2016. We have obtained (or licensed from
N.C. State) a number of patents covering these same technologies in key foreign
jurisdictions.
We intend to continue to file patent applications in the future, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, but we cannot be sure that any other patents will be issued on
such applications or that our patents will not be contested. In the past, one
of the important patents we license from N.C. State relating to crystal growth
was subject to re-examination in the U.S. but we prevailed in the proceeding.
Currently, the corresponding European patent is being challenged, which means
that we could lose patent protection in certain European countries for this
particular method. There is no assurance that other of our patents will not be
contested. Also, because issuance of a valid patent does not prevent other
companies from using alternative, non-infringing technology, we cannot be sure
that any of our patents (or patents issued to N.C. State or other parties and
licensed to us) will provide significant commercial protection.
In addition to patent protection, we also rely on trade secrets, technical
know-how and other unpatented proprietary information relating to our product
development and manufacturing activities. We try to protect this information
with
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confidentiality agreements with our employees and other parties. We cannot be
sure that these agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.
OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspects of our technology could be found to infringe the claims of
other existing or future patents. Other companies may hold or obtain patents on
inventions or may otherwise claim proprietary rights to technology necessary to
our business. We cannot predict the extent to which we may be required to seek
licenses.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 69% of our
revenue in fiscal 1996, about 79% of our revenue in fiscal 1997, about 74% of
our revenue in fiscal 1998 and about 62% of our revenue in the first six months
of fiscal 1999.
We expect that revenue from international sales will continue to be a
significant part of our total revenue. International sales are subject to a
variety of risks, including risks arising from currency fluctuations, the
emergence of the Euro, trading restrictions, tariffs, trade barriers and taxes.
Also, future U.S. Government or military export restrictions could limit or
prohibit sales of our products to customers in certain countries because of
their uses in military or surveillance applications.
Because all of our foreign sales are denominated in U.S. dollars, our products
become less price competitive in countries with currencies that are low or are
declining in value against the U.S. dollar. Also, we cannot be sure that our
international customers will continue to place orders denominated in U.S.
dollars. If they do not, our reported revenue and earnings will be subject to
foreign exchange fluctuations.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION.
We are subject to a variety of government regulations pertaining to chemical
and waste discharges and other aspects of our manufacturing process. For
example, we are responsible for the management of the hazardous materials we
use and disposal of hazardous waste resulting from our manufacturing process.
The proper handling and disposal of such hazardous material and waste requires
us to comply with certain government regulations. We believe we are in full
compliance with such regulations as of the date of this prospectus, but any
failure, whether intentional or inadvertent, to comply with such regulations
could have an adverse effect on our business. In addition, these regulations
may affect our ability to expand or change our manufacturing facility.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT AN INVESTMENT IN OUR STOCK.
The market price of our common stock has been and may continue to be subject to
wide fluctuations. Factors affecting our stock price may include:
o variations in operating results from quarter to quarter;
o changes in earning estimates by analysts;
o market conditions in the industry; and
o general economic conditions.
Our stock price has fluctuated widely. For example, between November 1997 and
January 1998 the price of our common stock dropped from approximately $29.50 to
$13.50 per share. Between August 1998 and January 11, 1999, the price of our
common stock rose from approximately $10.50 to $53.25 per share. Consequently,
the current market price of our common stock may not be indicative of future
market prices, and you may not be able to sustain or increase the value of your
investment in our common stock.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES.
We are evaluating all of our internal computers, computer equipment and other
equipment with embedded technology against Year 2000 concerns. Although we
believe our planning efforts are adequate to address our Year 2000 concerns, it
is still possible that we could experience negative consequences and material
costs caused by undetected errors or defects in the technology used in our
internal systems. Our most significant Year 2000 risk is that the systems of
other parties on which we rely, specifically our key suppliers, will not be
compliant on a timely basis. Any disruption in delivery of supplies to us that
is caused by a
10
<PAGE>
third party's failure to address Year 2000 issues would affect our ability to
manufacture our products, which could result in a material adverse effect on
our business, operating results and financial condition.
At this time, we are unable to estimate the most likely worst-case effects of
the arrival of the Year 2000 and we do not have a contingency plan for any
unanticipated negative effects.
11
<PAGE>
USE OF PROCEEDS
The Company estimates that the net proceeds from the sale of the shares of
common stock it is offering will be approximately $47.8 million. If the
underwriters fully exercise the over-allotment option, the net proceeds will be
approximately $55.1 million. "Net proceeds" is what the Company expects to
receive after paying the underwriting discount and other estimated expenses of
the offering.
Cree will use the net proceeds of the offering as follows:
o approximately $30 to $35 million of the net proceeds will be used to fund
the build-out and expansion of the Company's facilities, as well as the
purchase of equipment;
o approximately $10 million of the net proceeds will be used to repay the
outstanding balance on the Company's term loan, which has an interest rate
of 8.0% and matures on December 10, 2011; and
o the balance of the net proceeds, if any, will be used for general corporate
purposes, including working capital and research and development.
The Company reserves the right to vary the use of proceeds among the categories
listed above because the Company's ability to use the proceeds in the
approximate amounts listed is dependent on a number of factors, including the
unexpected costs of equipment and other capital expenditures, the progress of
new product research and development and the continued success of the Company's
products. Pending such uses, the Company intends to invest the net proceeds
from this offering in investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its common stock and
does not anticipate that it will do so in the foreseeable future. There are no
contractual restrictions in place that currently materially limit, or are
likely in the future to materially limit, the Company from paying dividends on
its common stock, but applicable state law may limit the payment of dividends.
The present policy of the Company is to retain earnings, if any, to provide
funds for the operation and expansion of its business.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's common stock has traded publicly on the Nasdaq National Market
under the symbol "CREE" since February 8, 1993, the date of the Company's
initial public offering. The following table sets forth the high and low sales
prices for the Company's common stock for the periods indicated as reported by
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------------ -----------
<S> <C> <C>
FISCAL 1997
First Quarter ..................................... $ 15.750 $ 8.250
Second Quarter .................................... 14.000 8.875
Third Quarter ..................................... 15.875 9.375
Fourth Quarter .................................... 15.125 9.500
FISCAL 1998
First Quarter ..................................... $ 20.500 $ 11.750
Second Quarter .................................... 29.500 15.625
Third Quarter ..................................... 19.625 13.500
Fourth Quarter .................................... 17.625 14.000
FISCAL 1999
First Quarter ..................................... $ 17.500 $ 10.500
Second Quarter .................................... 47.000 13.625
Third Quarter (through February 10, 1999) ......... 53.250 35.375
</TABLE>
On February 10, 1999, the last sale price reported on the Nasdaq National
Market for the common stock was $39.625 per share. On December 27, 1998, there
were approximately 386 holders of record of the common stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
27, 1998 on an actual and as adjusted basis to reflect the sale of 1,300,000
shares of common stock offered by the Company hereby, at an offering price of
$39.375 per share, after deducting the underwriting discount and the estimated
offering expenses payable by the Company and the application of the net
proceeds. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 27, 1998
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ....................................... $ 12,769 $ 50,616
======== ========
Long-term debt, less current portion ............................ $ 9,879 $ --
Shareholders' equity:
Preferred stock, $0.01 par value; 3,000 shares authorized; none
issued and outstanding ....................................... -- --
Common stock, $0.005 par value; 30,000 shares authorized;
12,920 shares issued and outstanding; 14,220 shares issued and
outstanding as adjusted (1) .................................. 65 71
Additional paid-in capital ..................................... 49,583 97,424
Retained earnings ............................................... 10,341 10,341
-------- --------
Total shareholders' equity ................................... 59,989 107,836
-------- --------
Total capitalization ........................................ $ 69,868 $107,836
======== ========
</TABLE>
- -------------------
(1) Excludes 1,984,547 shares of common stock reserved for issuance upon the
exercise of stock options and warrants outstanding at December 27, 1998, of
which 88,821 shares were issued between December 27, 1998 and February 10,
1999.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Company derived the statement of income data for the years ended June 30,
1996 and 1997 and June 28, 1998, and balance sheet data as of June 30, 1997 and
June 28, 1998 from the audited financial statements in this prospectus. Those
financial statements were audited by PricewaterhouseCoopers LLP, independent
accountants. The Company derived the statement of income data for the years
ended June 30, 1994 and 1995 and the balance sheet data as of June 30, 1994,
1995 and 1996 from audited financial statements that are not included in this
prospectus. The Company derived the statement of income data for the six months
ended December 28, 1997 and December 27, 1998 and balance sheet data at December
27, 1998 from the unaudited financial statements included in this prospectus.
The Company's management believes that the unaudited historical financial
statements contain all adjustments needed to present fairly the information
included in those statements, and that the adjustments made consist of normal
recurring adjustments. Historical results are not necessarily indicative of
results of operations to be expected in the future, and the results for the six
months ended December 27, 1998 are not necessarily indicative of results to be
expected for the entire year. The following selected consolidated financial data
should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto, and with Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 28,
1994(1) 1995 1996 1997 1998
---------- ---------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Product revenue, net ................... $ 3,534 $ 5,989 $ 9,689 $ 19,823 $ 34,891
Contract revenue, net .................. 3,956 3,011 3,945 6,535 7,640
License fee income ..................... -- -- 1,423 2,615 --
------- ------- ------- --------- ---------
Total revenue ....................... 7,490 9,000 15,057 28,973 42,531
Cost of revenue:
Product revenue, net ................... -- 4,244 8,411 13,388 21,727
Contract revenue, net .................. -- 1,773 3,078 5,707 6,252
------- ------- ------- --------- ---------
Total cost of revenue ............... 5,923 6,017 11,489 19,095 27,979
------- ------- ------- --------- ---------
Gross profit ............................ 1,567 2,983 3,568 9,878 14,552
Operating expenses: .....................
Research and development ............... 712 1,194 1,286 1,826 1,774
Sales, general and administrative ...... 1,740 2,268 2,917 4,301 4,131
Other (income) expense .................. 3 (1) (11) 639 502
------- -------- ------- --------- ---------
Income (loss) from operations ........... (888) (478) (624) 3,112 8,145
Interest income, net .................... 457 461 867 607 730
------- ------- ------- --------- ---------
Income (loss) before income taxes ...... (431) (17) 243 3,719 8,875
Income tax expense ...................... -- -- -- 177 2,600
------- ------- ------- --------- ---------
Net income (loss) ....................... $ (431) $ (17) $ 243 $ 3,542 $ 6,275
======= ======= ======= ========= =========
Earnings per share:
Basic .................................. $ (0.04) $ 0.00 $ 0.02 $ 0.28 $ 0.49
======= ======= ======= ========= =========
Diluted ................................ $ (0.04) $ 0.00 $ 0.02 $ 0.27 $ 0.47
======= ======= ======= ========= =========
Shares used in per share calculation:
Basic .................................. 10,337 10,367 11,826 12,455 12,863
======= ======= ======= ========= =========
Diluted ................................ 10,337 10,367 12,615 13,126 13,493
======= ======= ======= ========= =========
<CAPTION>
SIX MONTHS ENDED
----------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
-------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA) SHARE DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Product revenue, net ................... $ 16,369 $ 23,525
Contract revenue, net .................. 3,944 2,792
License fee income ..................... -- --
--------- ---------
Total revenue ....................... 20,313 26,317
Cost of revenue:
Product revenue, net ................... 10,365 11,792
Contract revenue, net .................. 3,252 2,252
--------- ---------
Total cost of revenue ............... 13,617 14,044
--------- ---------
Gross profit ............................ 6,696 12,273
Operating expenses: .....................
Research and development ............... 920 1,927
Sales, general and administrative ...... 1,985 2,668
Other (income) expense .................. 390 567
--------- ---------
Income (loss) from operations ........... 3,401 7,111
Interest income, net .................... 332 135
--------- ---------
Income (loss) before income taxes ...... 3,733 7,246
Income tax expense ...................... 1,093 2,029
--------- ---------
Net income (loss) ....................... $ 2,640 $ 5,217
========= =========
Earnings per share:
Basic .................................. $ 0.21 $ 0.41
========= =========
Diluted ................................ $ 0.20 $ 0.39
========= =========
Shares used in per share calculation:
Basic .................................. 12,699 12,876
========= =========
Diluted ................................ 13,522 13,541
========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------- JUNE 28, DECEMBER 27,
1994 1995 1996 1997 1998 1998
--------- --------- ----------- ----------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 4,902 $ 3,748 $ 10,162 $ 10,448 $ 17,680 $ 12,769
Working capital ................................... 11,006 9,970 18,596 21,013 27,603 24,383
Total assets ...................................... 20,018 20,924 43,796 50,137 72,724 78,103
Long-term debt, including current portion ......... 23 -- -- -- 8,667 10,000
Shareholders' equity .............................. 19,334 19,504 40,672 45,125 54,865 59,989
</TABLE>
- -------------------
(1) During this period, the Company did not report cost of revenue by type.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE FOLLOWING
DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN REVENUE, GROSS
MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS, INCLUDING
WORDS SUCH AS "MAY," "WILL," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AS WELL AS OTHER RISKS AND
UNCERTAINTIES REFERENCED IN THIS PROSPECTUS.
OVERVIEW
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. We recognize product revenue at the time
of shipment or in accordance with the terms of the relevant contract. We derive
the largest portion of our revenue from the sale of blue and green LED
products. We offer LEDs at two brightness levels -- high brightness blue and
green products and standard blue products. Our LED devices are utilized by end
users for automotive backlighting, liquid crystal display ("LCD") backlighting
(including use in wireless handsets), indicator lamps, miniature white lights
(such as replacements for miniature incandescent bulbs), indoor sign and arena
displays, outdoor full color stadium displays, traffic signals and other
lighting applications. LED products represented 48% of our revenue in both
fiscal 1998 and the first six months of fiscal 1999.
The high brightness products, which were introduced to the market in September
1998 in limited quantities, are currently being integrated into our
manufacturing facility for full production. During the first six months of
fiscal 1999, margins realized on the high brightness products were
substantially lower than those derived from our standard blue LED product, as
the yield was lower than the standard product. Historically, we have
experienced low margins with many new product introductions, and we are working
to make improvements to output and yield during the second half of fiscal 1999.
We anticipate that the high brightness products will contribute greater volumes
as yield improvements are obtained.
We believe that in order to increase market demand for all of our LED products,
we must continue to substantially lower average sales prices. Historically, we
have been successful in achieving lower costs for the standard blue product.
During the remainder of fiscal 1999, we plan to focus on reducing costs through
higher production yields and from higher volumes as fixed costs are spread over
a greater number of units.
We also derive revenue from the sale of advanced materials made from SiC that
are used primarily for research and development. We also sell SiC crystals to
C3, Inc. ("C3"), which incorporates them in gemstone applications. During late
fiscal 1998 and the first six months of fiscal 1999, C3 purchased equipment
from us, which has more than doubled the capacity for the production of
crystals for C3. Sales of advanced materials made from SiC represented 34% of
our revenue in fiscal 1998 and approximately 41% during the first six months of
fiscal 1999.
The balance of our revenue, 18% for fiscal 1998 and 11% for the first six
months of fiscal 1999, is derived from government contract funding. Under
various programs, U.S. Government entities further the development of our
technology by supplementing our research and development efforts. All resulting
technology obtained through these efforts remains our property after the
completion of the contract, subject to certain license rights retained by the
government. Contract revenue includes funding of direct research and
development costs and a portion of our general and administrative expenses and
other operating expenses for contracts under which we expect funding to exceed
direct costs over the life of the contract. For contracts under which we
anticipate that direct costs will exceed amounts to be funded over the life of
the contract (i.e., certain cost-share arrangements), we report direct costs as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
16
<PAGE>
In September 1996, we entered into an agreement with Siemens AG ("Siemens")
under which Siemens agreed to purchase our blue LED chips. In December 1998,
this agreement was amended to provide for additional shipments of LED products
through September 1999. This contract calls for declining prices based on an
increase in the number of units shipped. Siemens accounted for 40% of our
revenue for both fiscal 1998 and the first six months of fiscal 1999.
We also are party to certain license agreements related to our technology for
the manufacture of blue and green LEDs under which we have received one-time
license fees. Under these license agreements, our obligation to transfer the
licensed technology was completed in the year that the license fee revenue was
recognized.
On September 24, 1997, the Board of Directors changed our fiscal year from the
twelve months ending June 30, to a 52 or 53 week year ending on the last Sunday
in the month of June. Our 1998 fiscal year extended from July 1, 1997 to June
28, 1998.
RESULTS OF OPERATIONS
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, DECEMBER 28, DECEMBER 27,
1996 1997 1998 1997 1998
---------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net ...................... 64.3% 68.4% 82.0% 80.6% 89.4%
Contract revenue, net ..................... 26.2 22.6 18.0 19.4 10.6
License fee income ........................ 9.5 9.0 -- -- --
----- ----- ----- ----- -----
Total revenue ........................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue, net ...................... 55.9 46.2 51.1 51.0 44.8
Contract revenue, net ..................... 20.4 19.7 14.7 16.0 8.6
----- ----- ----- ----- -----
Total cost of revenue ................... 76.3 65.9 65.8 67.0 53.4
----- ----- ----- ----- -----
Gross margin ............................... 23.7 34.1 34.2 33.0 46.6
Operating expenses:
Research and development .................. 8.5 6.3 4.2 4.5 7.3
Sales, general and administrative ......... 19.4 14.9 9.6 9.8 10.1
Other expense ............................. -- 2.2 1.2 1.9 2.2
----- ----- ----- ----- -----
Income (loss) from operations ........... ( 4.2) 10.7 19.2 16.8 27.0
Interest income, net ....................... 5.8 2.1 1.7 1.6 0.5
----- ----- ----- ----- -----
Income before income taxes .............. 1.6 12.8 20.9 18.4 27.5
Income tax expense ......................... -- 0.6 6.1 5.4 7.7
----- ----- ----- ----- -----
Net income .............................. 1.6% 12.2% 14.8% 13.0% 19.8%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
REVENUE. Revenue increased 30% from $20.3 million in the first six months of
fiscal 1998 to $26.3 million in the first six months of fiscal 1999. This
increase was attributable to an increase in product revenue of 44% from $16.4
million in the first six months of fiscal 1998 to $23.5 million in the first
six months of fiscal 1999. This rise in product revenue was a result of the
128% increase in sales of our LED products in the first six months of fiscal
1999 compared to the first six months of fiscal 1998. Growth in LED volume was
due in part to the introduction of the new high brightness devices, but mostly
was a result of
17
<PAGE>
improvements in the product design of and strong demand for the standard
brightness product. This volume increase was partly offset by a 40% decline in
the average sales price of the standard blue LED chip during this same period.
We believe that in order to increase volume we must continue to lower average
sales prices.
Revenue attributable to sales of SiC material was 84% higher in the first six
months of fiscal 1999 than in the same period of fiscal 1998 due to a
significant increase in sales to C3 for gemstone applications. During the first
six months of fiscal 1998, C3 was in initial stages of operation; therefore,
unit sales were limited. Revenue from sales of SiC wafers increased 43% in the
first six months of fiscal 1999 as compared to the first six months of fiscal
1998, due to quality improvements in wafers, along with the availability of the
larger two-inch wafer during fiscal 1999. During the first six months of fiscal
1999, sales from our displays business declined 96% over the prior year period
as we have chosen to de-emphasize this product line. Contract revenue received
from U.S. Government agencies declined 29% during the first six months of
fiscal 1999 compared to the first six months of fiscal 1998, as a significant
contract that funded optoelectronic research was exhausted in early fiscal
1999.
GROSS PROFIT. Gross margin climbed to 47% of revenue during the first six
months of fiscal 1999 as compared to 33% during the first six months of fiscal
1998. This increase is predominantly attributable to design and manufacturing
improvements that occurred over the past year resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the
new chip structure and improved yield. During the first six months of fiscal
1998, we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. As of December 1997, we were
still in the process of establishing these new manufacturing designs and had
not achieved production efficiency. In addition, the larger two-inch wafer had
not been in full production for much of the period; therefore, average die
yields during the first six months of fiscal 1998 were significantly lower.
Wafer costs for SiC material sales also declined 47% during the first six
months of fiscal 1999 over the comparative period due to more efficient
processes and improved yield.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 109% in
the first six months of fiscal 1999 to $1.9 million from $0.9 million in the
first six months of fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED product. We anticipate that internal funding for the development
of new products will continue to grow in future periods, while we believe that
government funding for our development projects will remain constant or
decrease.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expenses
increased 34% in the first six months of fiscal 1999 to $2.7 million from $2.0
million in the first six months of fiscal 1998 due primarily to two insurance
events that were recorded in the second quarter of fiscal 1998. As a result of
the dismissal of a securities class action lawsuit in November 1997, we were
reimbursed $0.2 million for costs incurred in connection with the lawsuit. Most
of these expenses were recorded in fiscal 1997. In addition, we received a $0.2
million reimbursement of medical expenses due to a negotiated cost cap in a
partially self-funded insured health plan. Also as a result of our increased
profitability during the first six months of fiscal 1999 over the first six
months of fiscal 1998, the profit sharing accrual (which is based on 5% of net
income) has grown $0.2 million. We anticipate that total sales, general and
administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant or possibly decline.
OTHER (INCOME) EXPENSE. Other expense increased 45% to $0.6 million during the
first six months of fiscal 1999 from $0.4 million for the first six months of
fiscal 1998. In the first six months of fiscal 1999, we realized impairments to
leasehold costs as a result of management's decision to move equipment from our
leased facility to our new manufacturing site. This was offset somewhat by
income recognized under our equipment build-out agreement with C3. In 1998, we
sold to C3 equipment manufactured by us at cost plus a reasonable overhead
allocation. The overhead allocation was recorded as "Other income."
18
<PAGE>
INTEREST INCOME, NET. Interest income, net has decreased 59% to $0.1 million in
the first six months of fiscal 1999 from $0.3 million in the first six months
of fiscal 1998 due to interest expense incurred. In November 1997, we obtained
a term loan from NationsBank to fund the acquisition and construction of our
manufacturing facility in Durham, North Carolina. While much of the interest
was capitalized during the last half of fiscal 1998, the majority of the
interest incurred in the first half of fiscal 1999 has been expensed.
INCOME TAX EXPENSE. Income tax expense for the first six months of fiscal 1999
was $2.0 million compared to $1.1 million in the first six months of fiscal
1998. This increase resulted from increased profitability during the first six
months of fiscal 1999 over fiscal 1998. Our effective tax rate during the first
six months of fiscal 1999 was 28% compared to 29% in the first six months of
fiscal 1998.
FISCAL YEARS ENDED JUNE 28, 1998 AND JUNE 30, 1997 AND 1996
REVENUE. Revenue increased 47% from $29.0 million in fiscal 1997 to $42.5
million in fiscal 1998. A significant portion of the rise was attributable to
the 132% increase in LED volume sold pursuant to an amendment to the purchase
agreement with Siemens. This agreement and two subsequent amendments provided
$6.8 million in additional revenue in fiscal 1998 over fiscal 1997. This
significant increase in volume sold was offset by a 32% decline in our average
sales price per LED sold.
Wafer and other materials revenue increased 110% in fiscal 1998 over fiscal
1997 due to a 29% increase in wafer volume associated with greater interest in
the worldwide research community for SiC-based products, as well as revenues
from C3. C3 activity grew as a result of the execution in July 1997 of the new
supply agreement and development agreement. Revenues for the displays business
increased 37% in fiscal 1998 over fiscal 1997 due to increased interest among
customers for indoor video displays.
Contract revenue increased 17% to $7.6 million during fiscal 1998 as compared
to fiscal 1997 as a result of a change in the mix of funding from available
contracts. Funding for fiscal 1997 included a higher amount of proceeds
recognized under two cost-share arrangements. For these arrangements, funds are
recorded as a reduction in research and development expense rather than as
contract revenue. As funds associated with these two programs were exhausted
during fiscal 1998, we shifted our resources to programs under a cost-plus or
catalog price arrangement, in which funding is recorded as contract revenue.
Therefore contract revenue was higher in fiscal 1998 than 1997.
Included in revenue for fiscal 1997 is a one-time license fee of $2.6 million.
This license fee was earned pursuant to a License and Technology Transfer
Agreement entered into in September 1996 with Shin-Etsu Handotai Co. Ltd.
("Shin-Etsu"). Pursuant to this agreement, we granted Shin-Etsu a license to
use certain epitaxial and device fabrication process technology for the
manufacture of our blue LED product. We did not record any license fee revenue
during fiscal 1998.
In fiscal 1997, our revenue of $29.0 million represented a 92% increase over
fiscal 1996 revenue of $15.1 million. The most substantial increase in revenue
occurred in the LED product line as a 70% increase in sales was recorded. Much
of this increase was attributable to higher volume stemming from the original
purchase agreement and first amendment with Siemens. Fiscal 1997 was the first
year our LEDs were incorporated into automotive backlighting applications.
During fiscal 1997, wafer sales grew 60% over fiscal 1996 due to a greater
acceptance of SiC material in the marketplace. In addition, the average sales
price per wafer was also increased during fiscal 1997 due to the availability
of higher quality premium wafer products. Revenues for the displays business
increased 76% in fiscal 1997 from fiscal 1996 due to the introduction of the
modules products in that year for indoor arena applications.
Contract revenue grew 66% to $6.5 million in fiscal 1997 over fiscal 1996 due
largely to increased funding from the U.S. Government for certain research
contracts, primarily in the areas of microwave, power, blue laser and basic
material development.
Results for fiscal 1996 include $1.4 million in one-time net license fee
revenue. This license fee was earned pursuant to a development license and
supply agreement entered into with Siemens in October 1995, under which we
granted Siemens a license to use certain technology to manufacture blue and
green LED products.
19
<PAGE>
GROSS PROFIT. Our gross profit increased 47% to $14.6 million in fiscal 1998
over fiscal 1997. Our gross margin was 34% for both fiscal 1998 and fiscal
1997. License fees, which have no corresponding cost, were included in fiscal
1997 results. Without license fee revenue, gross profit would have been $7.3
million or 28% of revenue for fiscal 1997. The overall increase in gross profit
in fiscal 1998 resulted from higher revenue and lower LED and material costs
per unit. The lower LED and wafer costs were recognized due to higher
throughput, which more effectively utilized plant capacity and yield
efficiencies. The greater throughput enabled us to spread fixed cost
investments over a larger volume of product. Greater yield in LED applications
resulted from a combination of a new smaller die size and a new larger two-inch
diameter wafer and in the fourth quarter of fiscal 1998, the introduction of
the conductive buffer technology. Yield was also higher for LED and materials
due to plant processing efficiency and a higher quality of wafer materials used
in these products.
The cost of contract revenue has increased in fiscal 1998 over fiscal 1997 due
to the change in the mix of funding from available contracts. Costs for fiscal
1997 included a higher amount of expenses recognized under two cost-share
arrangements. For these arrangements, costs are recorded as research and
development expenses rather than cost of contract revenue. When funding under
these two contracts was completed in the second quarter of fiscal 1998, all
resources were shifted to cost-plus and catalog priced contracts, where
expenses are recorded as a cost of contract revenue.
In fiscal 1997 as compared to fiscal 1996, our gross margin climbed to 34% from
24%, respectively. License fee revenue, which has no corresponding cost, was
recorded in both years. Without license fees, gross margin would have been 28%
in fiscal 1997 as compared to 16% in fiscal 1996. Higher gross profit recorded
in fiscal 1997 stemmed from significantly improved yields and manufacturing
processes, as compared with fiscal 1996, when we experienced difficulty with
the ramp of LED production due to poor epitaxial yields. These processes were
corrected during the first six months of fiscal 1997.
Contract cost of revenue was significantly higher in fiscal 1997 than fiscal
1996 due largely to increased funding from the U.S. Government for certain
research contracts, primarily in the areas of microwave, power, blue laser and
basic material development.
RESEARCH AND DEVELOPMENT. Research and development costs decreased by 3% to
approximately $1.8 million in fiscal 1998 from approximately $1.8 million in
fiscal 1997 due to a reduction in work performed under two cost-share contracts
to further the blue laser research. These cost-share contracts concluded during
the first half of fiscal 1998. Additionally, research and development costs for
fiscal 1997 included a one-time write-off of $0.1 million for the closure of
our Eastern European Division, located in St. Petersburg, Russia.
Research and development spending was higher in fiscal 1997 than fiscal 1996
due to the work performed under the cost-share arrangements. These cost-share
contracts were not in place in fiscal 1996.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative
expenses decreased 4% to $4.1 million for fiscal 1998 from $4.3 million in
fiscal 1997 due to the receipt of two one-time insurance payments. As a result
of the dismissal in November 1997 of a securities class action lawsuit filed in
October 1996, we were reimbursed $0.2 million from our insurance carrier for
costs incurred in defense of the suit. In addition, as a result of a negotiated
cost cap, we received a $0.2 million reimbursement of medical expenses that
were incurred under a partially self-funded insured health plan. As a
percentage of revenue, these costs have decreased to 10% in fiscal 1998 from
15% in fiscal 1997.
Total sales, general and administrative expenses increased 47% to $4.3 million
in fiscal 1997 from $2.9 million in fiscal 1996 due to higher costs associated
with additional sales personnel to focus the business on gaining new LED
customers, the Shin-Etsu license agreement commission fee of $0.2 million and
greater legal fees in connection with the defense of a securities class action
lawsuit.
OTHER (INCOME) EXPENSE. In fiscal 1998, other expense included a net loss
recorded on the write-down of leasehold improvements associated with a leased
facility in Durham, North Carolina and disposal of certain other fixed assets
and a write-off of $66,000 for the remaining value of goodwill associated with
the acquisition of the Real Color Displays subsidiary. In addition, we entered
into an agreement with C3 to sell
20
<PAGE>
equipment manufactured by us at cost plus a reasonable overhead allocation. The
overhead allocation was recorded as "Other income;" however, the amount was
more than offset by leasehold write-offs associated with the move to our new
facility and other asset disposals. Other expense for fiscal 1997 was higher
than that recorded in fiscal 1998 as large fixed asset write-downs were
recorded as the result of a physical plant inventory. These write-downs were
greater than those recorded in fiscal 1998.
INTEREST INCOME, NET. Interest income, net increased by $0.1 million in fiscal
1998 over fiscal 1997 and decreased by $0.3 million when comparing fiscal 1997
to fiscal 1996 due to higher investable cash balances available in fiscal 1998
and fiscal 1996. Cash balances were higher in fiscal 1998 as we generated
approximately $12.1 million from operations compared to approximately $6.1
million in fiscal 1997. Also, we concluded a private equity placement in
September 1995 that increased available cash in fiscal 1996.
INCOME TAX EXPENSE. Our effective income tax rate increased to 29% for fiscal
1998 from a 5% effective rate during fiscal 1997. The lower rate for fiscal
1997 resulted from the utilization of net operating loss carryforwards. We had
no tax provision in fiscal 1996 as we generated a net operating loss for tax
purposes.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table shows unaudited quarterly results of operations in dollar
amounts and as a percentage of revenue for the periods indicated. We have
prepared this information on a basis consistent with our audited financial
statements and included all adjustments that we consider necessary for a fair
presentation of the information for the periods presented. Results of
operations for any fiscal quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 28, DEC. 28,
1997 1997 1997 1997
----------- ---------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Product revenue, net ................... $ 5,571 $ 6,940 $8,206 $ 8,164
Contract revenue, net .................. 1,395 1,539 2,001 1,942
-------- ------- -------- --------
Total revenue ......................... 6,966 8,479 10,207 10,106
Cost of revenue:
Product revenue ........................ 3,488 4,691 5,419 4,946
Contract revenue ....................... 1,244 1,245 1,653 1,600
-------- ------- -------- --------
Total cost of revenue ................. 4,732 5,936 7,072 6,546
-------- ------- -------- --------
Gross profit ............................ 2,234 2,543 3,135 3,560
Operating expenses:
Research and development ............... 485 579 394 527
Sales, general and administrative ...... 1,079 1,252 1,140 850
Other expense (income) ................. 204 256 (6) 390
-------- ------- --------- --------
Income from operations ................ 466 456 1,607 1,793
Interest income, net .................... 138 145 164 169
-------- ------- -------- --------
Income before income taxes ............ 604 601 1,771 1,962
Income tax expense (benefit) ............ 50 (123) 602 490
-------- ------- -------- --------
Net income ............................. $ 554 $ 724 $1,169 $ 1,472
======== ======= ======== ========
Earnings per share:
Basic .................................. $ 0.04 $ 0.06 $ 0.09 $ 0.12
======== ======= ======== ========
Diluted ................................ $ 0.04 $ 0.05 $ 0.09 $ 0.11
======== ======= ======== ========
Shares used in per share calculation:
Basic .................................. 12,326 12,455 12,609 12,789
Diluted ................................ 13,056 13,003 13,408 13,636
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 29, JUNE 28, SEPT. 27, DEC. 27,
1998 1998 1998 1998
----------- ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Product revenue, net ................... $ 8,929 $ 9,593 $ 10,720 $ 12,805
Contract revenue, net .................. 1,742 1,955 1,559 1,233
-------- -------- -------- --------
Total revenue ......................... 10,671 11,548 12,279 14,038
Cost of revenue:
Product revenue ........................ 5,510 5,852 5,415 6,377
Contract revenue ....................... 1,430 1,573 1,207 1,045
-------- -------- -------- --------
Total cost of revenue ................. 6,940 7,425 6,622 7,422
-------- -------- -------- --------
Gross profit ............................ 3,731 4,123 5,657 6,616
Operating expenses:
Research and development ............... 367 487 806 1,121
Sales, general and administrative ...... 1,041 1,105 1,218 1,450
Other expense (income) ................. 31 79 269 298
-------- -------- -------- --------
Income from operations ................ 2,292 2,452 3,364 3,747
Interest income, net .................... 180 217 115 20
-------- -------- -------- --------
Income before income taxes ............ 2,472 2,669 3,479 3,767
Income tax expense (benefit) ............ 717 790 1,113 916
-------- -------- -------- --------
Net income ............................. $ 1,755 $ 1,879 $ 2,366 $ 2,851
======== ======== ======== ========
Earnings per share:
Basic .................................. $ 0.13 $ 0.14 $ 0.18 $ 0.22
======== ======== ======== ========
Diluted ................................ $ 0.13 $ 0.14 $ 0.18 $ 0.21
======== ======== ======== ========
Shares used in per share calculation:
Basic .................................. 13,028 13,026 12,920 12,832
Diluted ................................ 13,501 13,429 13,249 13,834
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, JUNE 30, SEPT. 28,
1997 1997 1997
----------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Product revenue, net .................. 80.0% 81.8% 80.4%
Contract revenue, net ................. 20.0 18.2 19.6
----- ----- -----
Total revenue ....................... 100.0 100.0 100.0
Cost of revenue:
Product revenue ....................... 50.1 55.3 53.1
Contract revenue ...................... 17.9 14.7 16.2
----- ----- -----
Total cost of revenue ............... 68.0 70.0 69.3
----- ----- -----
Gross profit ........................... 32.0 30.0 30.7
Operating expenses:
Research and development .............. 7.0 6.8 3.9
Sales, general and administrative ..... 15.5 14.8 11.2
Other expense (income) ................ 2.9 3.0 ( 0.1)
----- ----- -----
Income from operations .............. 6.6 5.4 15.7
Interest income, net ................... 2.0 1.7 1.6
----- ----- -----
Income before income taxes .......... 8.6 7.1 17.3
Income tax expense (benefit) ........... 0.7 ( 1.5) 5.9
----- ----- -----
Net income ............................ 7.9% 8.6% 11.4%
===== ===== =====
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27, DEC. 27,
1997 1998 1998 1998 1998
---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net .................. 80.8% 83.7% 83.1% 87.3% 91.2%
Contract revenue, net ................. 19.2 16.3 16.9 12.7 8.8
----- ----- ----- ----- -----
Total revenue ....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue ....................... 48.9 51.6 50.7 44.1 45.4
Contract revenue ...................... 15.8 13.4 13.6 9.8 7.4
----- ----- ----- ----- -----
Total cost of revenue ............... 64.7 65.0 64.3 53.9 52.8
----- ----- ----- ----- -----
Gross profit ........................... 35.3 35.0 35.7 46.1 47.2
Operating expenses:
Research and development .............. 5.2 3.4 4.2 6.6 8.0
Sales, general and administrative ..... 8.4 9.8 9.5 9.9 10.3
Other expense (income) ................ 3.9 0.3 0.8 2.2 2.1
----- ----- ----- ----- -----
Income from operations .............. 17.8 21.5 21.2 27.4 26.8
Interest income, net ................... 1.7 1.7 1.9 0.9 0.1
----- ----- ----- ----- -----
Income before income taxes .......... 19.5 23.2 23.1 28.3 26.9
Income tax expense (benefit) ........... 4.8 6.7 6.9 9.1 6.5
----- ----- ----- ----- -----
Net income ............................ 14.7% 16.5% 16.2% 19.2% 20.4%
===== ===== ===== ===== =====
</TABLE>
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of December 27, 1998, we had
working capital of approximately $24.4 million, including $13.7 million in cash
and cash equivalents and liquid marketable securities.
Operating activities generated $4.2 million in cash during the first six months
of fiscal 1999. This was attributable primarily to net income of $5.2 million
and other non cash expenses of $3.3 million. These amounts were partly offset
by an increase of $2.0 million in accounts receivable, a $0.9 million rise in
inventory and a $3.1 million decrease in accounts payable.
Most of the $10.4 million of cash used by investing activities in the first six
months of fiscal 1999 was related to expenditures associated with the continued
construction of our new manufacturing facility in Durham, North Carolina. We
also increased manufacturing capacity by adding new equipment to support the
epitaxial deposition and clean room fabrication processes.
The $1.2 million of cash provided by financing activities in the first six
months of fiscal 1999 related primarily to the receipt of $1.8 million and $0.7
million in proceeds from the exercise of stock warrants and stock options from
the Company's employee stock option plan, respectively. In addition, $0.6
million was received from a Director as payment of profits from a short-swing
transaction in our securities and $1.3 million was funded as the final draw
from the long term debt arrangement with NationsBank. We currently have a $10.0
million loan outstanding from NationsBank. We expect to pay off this loan with
proceeds from this offering. These cash proceeds were offset by a $3.2 million
cash outlay for the repurchase of our common stock. This stock was repurchased
at an average price of $13.68 per share. The stock warrants exercised were
distributed in connection with our September 1995 private placement and have an
exercise price of $27.23. As of December 27, 1998 warrants remained outstanding
to purchase 234,575 shares; these warrants will expire in September 2000.
We are currently engaged in construction activities related to a new clean room
fabrication facility. We also intend to expand our facility for new crystal
growth and test and packaging areas in calendar 1999. These additions will
allow us to consolidate all LED and wafer manufacturing facilities to one site
with improved manufacturing capabilities. In addition, in order to keep pace
with anticipated growth in LED and wafer sales and provide expanded facilities
for our new microwave product line, we anticipate a second phase of expansion
to facilities and infrastructure to begin in early fiscal 2000. We anticipate
total costs for these expenses to be between $15 and $18 million. Estimates for
equipment costs related to this expansion total between $15 and $17 million. We
plan to fund these capital projects from the proceeds of this offering. In
addition, we are in the process of purchasing a 79-acre site close to our
present facility for $1.5 million. We anticipate that internally generated cash
plus the proceeds of this offering will be sufficient to fund our capital
requirements for the next 12 months.
IMPACT OF THE YEAR 2000
STATE OF READINESS
We have adopted a Year 2000 compliance plan and formed a team of information
technology professionals assigned to the task of identifying and resolving any
Year 2000 issues that may affect our business. Our compliance plan has four
phases: inventory, assessment, remediation and testing. We have completed an
inventory for all of our computer systems, computer related equipment and
equipment with embedded processors, as well as our products, and are in the
process of assessing those systems. We have completed this assessment with
respect to approximately 80% of our systems and expect to complete our
assessment of the remaining systems by February 1999. In addition, we have
determined that our products are of a nature that they are not subject to
failure as a result of Year 2000 issues. Although we cannot control whether and
how third parties will address the Year 2000 issue, we also are in the process
of contacting critical vendors and suppliers to assess their ability to ensure
smooth delivery of products without disruptions caused by Year 2000 problems.
In the course of our assessment, we have not yet identified any Year 2000
issues that would affect our ability to do business; however, our assessment is
not complete, and there can be no assurance that
23
<PAGE>
there are no Year 2000 issues that may affect us. Once we complete the
assessment phase, we will prioritize and implement necessary repairs or
replacements to equipment and software to achieve Year 2000 compliance. We
expect to complete this phase by March 1999. The final phase will consist of a
testing program for all repairs. We anticipate that all testing will be
completed by April 1999.
COSTS
We have not prepared estimates of costs to remediate Year 2000 problems;
however, based on currently available information, including the results of our
assessment to date and our replacement schedule for equipment, we do not
believe that the costs associated with Year 2000 compliance will have a
material adverse effect on our business, results of operations or financial
condition.
YEAR 2000 RISKS
Although we believe that our Year 2000 compliance plan is adequate to address
Year 2000 concerns, there can be no assurance that we will not experience
negative consequences as a result of undetected defects or the non-compliance
of third parties with whom we interact. Furthermore, there can be no assurance
that there will not be a delay in, or increased costs associated with, the
implementation of corrections as the Year 2000 compliance plan is performed,
such as unexpected costs of correcting equipment that has not yet been fully
evaluated. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
We believe that our greatest risk stems from the potential non-compliance of
our suppliers. We depend on a limited number of suppliers for certain raw
materials, components and equipment necessary for the manufacture of our
products. Accordingly, if those suppliers are unable to process or fill our
orders or otherwise interact with us because of Year 2000 problems, we could
experience material adverse effects to our business. We are in the process of
assessing the Year 2000 status of our suppliers and are investigating
alternative sources of supply. As a consequence of our dependence on limited
sources of supply, we generally maintain a significant inventory of certain
critical materials and require suppliers to keep certain amounts of inventory
available for us; however, there can be no assurance that we will have enough
materials on hand to continue production without interruption in the event one
or more of our suppliers experiences Year 2000 problems that affect its (their)
ability to supply us. Any supply chain disruptions would affect our ability to
manufacture our products which could result in material adverse consequences to
our business, results of operations and financial condition.
CONTINGENCIES
We have not yet developed a contingency plan to address what would happen in
the event we are unable to address the Year 2000 issue. The contingency plan is
expected to be completed after the inquiry of vendors and customers is
completed.
24
<PAGE>
BUSINESS
INTRODUCTION
Cree is the world leader in developing and manufacturing semiconductor
materials and electronic devices made from SiC. Using its proprietary compound
semiconductor technology, the Company produces LEDs for use in automotive and
LCD backlighting, indicator lamps, full color LED displays and other lighting
applications. The Company also manufactures SiC crystals used in the production
of unique gemstone products and SiC wafers sold for research directed to
optoelectronics, microwave and power applications. SiC-based compound
semiconductor devices offer significant advantages over competing products
based on silicon, gallium arsenide ("GaAs") and other materials for certain
electronic applications. The Company has new product initiatives based on SiC,
including microwave devices for wireless base stations and radar systems,
larger and clearer crystals for moissanite gemstones, blue laser diodes for
optical storage applications and power devices for power conditioning and
switching and other uses.
BACKGROUND
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon evolved as the dominant semiconductor material because it is relatively
easy to grow into large, single crystals and is suitable for fabricating most
electronic devices. Alternative materials, such as GaAs, have emerged to enable
the fabrication of new devices with characteristics that could not be obtained
using silicon, including certain microwave, LED, laser and other optoelectronic
devices. However, GaAs, silicon and other commercially available semiconductor
materials have certain physical and electronic characteristics that limit their
usefulness in many applications. For example, silicon and GaAs-based
semiconductors are not suitable for the fabrication of short wavelength
optoelectronic devices. In addition, the power handling capabilities of silicon
and GaAs-based microwave transistors can limit the power and performance of
microwave systems used in many commercial and military aerospace applications.
Furthermore, few silicon or GaAs devices can operate effectively at
temperatures above 400|SD F. This is a major limitation in applications such as
advanced electronic systems for high power density electric motors, jet engines
and satellites.
Substantial research and development efforts have been undertaken to explore
the properties of other potential semiconductor materials. These efforts have
identified few candidate materials that are capable of being grown as low
defect single crystals (a requirement in the production of most semiconductors)
which also possess physical and electronic properties that meaningfully
increase device performance over products fabricated from currently available
semiconductor materials. Of the few potential candidates, the properties of SiC
make it an excellent material for extending existing semiconductor device
technology where high power, high temperature or short wavelengths are
important for performance.
SIC OVERVIEW
SiC has many physical characteristics that make the material very difficult to
produce. For example, in a typical semiconductor manufacturing process, the
semiconductor material is grown in single crystal form and sliced into wafers.
The wafers are then polished and chemically etched, coated with a thin film
containing controlled levels of impurities and fabricated into devices. Because
SiC can form many different atomic arrangements and must be grown at process
temperatures above 3,500|SDF, it is difficult to grow large single crystals
that are homogeneous in structure. In addition, the high temperatures required
to grow SiC make the control of impurity levels in SiC crystals and thin films
difficult. "Micropipes," or small diameter holes, may appear in the crystals
during crystal growth, affecting the electrical integrity of the wafer and
reducing the usability of portions of the wafer for certain applications.
Furthermore, slicing and polishing SiC wafers is hindered by the intrinsic
hardness of the material. Similarly, its inherent chemical resistance makes SiC
a difficult material to etch.
Many of the same physical characteristics that make SiC difficult to produce
also make it an excellent material for certain semiconductor applications. The
following characteristics distinguish SiC from
25
<PAGE>
conventional silicon and GaAs-based semiconductor materials, resulting in
significant advantages if production hurdles can be overcome:
o WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC is classified as
a "wide bandgap" semiconductor material, meaning that more energy is
required for ionization. Electronic devices made from this material can
operate more efficiently and at much higher temperatures than devices made
from other common semiconductor materials.
o HIGH BREAKDOWN ELECTRIC FIELD. The "breakdown electric field" is the amount
of voltage per unit distance that a material can withstand and still
effectively operate as a semiconductor device. SiC has a much higher
breakdown electric field than silicon or GaAs. This characteristic allows
SiC devices to operate at much higher voltage levels. Additionally, it
allows SiC power devices to be significantly smaller while carrying the
same as or greater power levels than comparable silicon and GaAs-based
devices.
o HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This feature enables
SiC-based devices to operate at high power levels and still dissipate the
excess heat generated.
o HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC has a "saturated electron drift
velocity" higher than that of silicon or GaAs. The electron drift velocity
is the maximum speed at which electrons can travel through a material. This
characteristic, combined with a high breakdown electric field, allows the
fabrication of SiC-based microwave transistors that operate at
significantly higher power levels than current silicon and GaAs-based
devices.
o ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. SiC is also extremely resistant to
chemical breakdown and can operate in a hostile environment. As a result,
SiC can withstand much higher electrical pulses and is much more radiation-
resistant than silicon or GaAs.
o GEMOLOGICAL APPEAL. In the gemstone industry, SiC is known as moissanite.
Its high refractive index and dispersion give it "diamond-like" sparkle or
fire. In addition, its hardness allows superior faceting and wear
resistance compared to many gemstone materials.
THE CREE SOLUTION
Through its proprietary technology and over 10 years of development and
manufacturing experience, Cree has succeeded in overcoming difficulties in
processing SiC for commercial use. The Company introduced its first product in
October 1989 and currently is the leading manufacturer of SiC wafers and
SiC-based blue and green LED products in the world. The Company believes that
its proprietary process techniques and the inherent attributes of SiC give
Cree's products significant advantages over competing products for certain
electronic and gemological applications. These advantages include:
o BLUE AND GREEN LIGHT EMISSION. Cree produces high efficiency blue and green
LEDs using gallium nitride ("GaN"), a wide bandgap material, and other
nitrides grown on SiC substrates. The conductive properties of SiC enable
Cree to fabricate a simpler, smaller LED chip as compared to competing blue
and green LEDs grown using GaN and related materials on sapphire
substrates. Cree has also demonstrated and is continuing development of
GaN-based blue laser diodes grown on SiC. The principal advantages of SiC
over other substrate materials for blue laser diodes are its high
electrical and thermal conductivity and its ability to be cleaved,
providing an excellent surface for laser light emission.
o ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and
power devices that offer significant advantages over competing products and
which could not be produced as effectively on other substrate materials.
The Company manufactures SiC wafers for both internal use and sale to
external development programs to further new product development. The
Company continues to develop larger substrates with lower defect
26
<PAGE>
densities, which should drive further device development and strengthen
SiC's economic advantages in certain applications.
o GEMSTONE MATERIAL PROPERTIES. Cree manufactures SiC crystals that are used
to produce moissanite gemstones. The combination of SiC's optical
properties (high refractive index and dispersion) and robust material
properties give these gemstones both diamond-like sparkle or fire and
hardness characteristics. Cree continues to develop larger and higher
quality SiC crystals for this application.
o HIGH POWER MICROWAVE OPERATION. The Company has demonstrated SiC microwave
transistors that can operate at much higher voltages than silicon or GaAs
because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. Higher power SiC devices can allow the
fabrication of SiC-based microwave transmitters with less circuit
complexity and higher total output power. These same advantages exist for
microwave devices made using GaN on SiC substrates, which can also operate
at much higher frequencies than SiC-only devices. The Company believes that
initial applications for its microwave devices now under development will
be for wireless base stations and radar systems. The high temperature
capabilities of SiC should also enable future aerospace and defense
applications.
o HIGH POWER, HIGH VOLTAGE OPERATION. Cree is developing SiC power diodes and
switches that are able to operate at higher power densities than currently
available semiconductor materials because of the much higher breakdown
electric field of SiC. In addition, Cree believes that its SiC power
devices will be able to operate with lower resistive losses and lower
switching losses than those made with silicon or GaAs.
STRATEGY
The Company's strategy is to continue to develop SiC materials and device
technology for use in enabling products and systems. The Company believes that
by supplying its customers with enabling component technology it allows them to
develop and deliver new systems that provide enhanced performance capabilities.
The Company's strategy incorporates the following key elements:
o GROW REVENUES THROUGH MULTIPLE PRODUCT LINES. The Company has focused its
technology on six primary product lines -- LEDs, SiC wafers, gemstone
crystals, microwave devices, power devices and laser diodes. The Company
generates its current product revenues primarily through the sale of blue
and green LEDs, SiC wafers and gemstone crystals. The Company plans to
leverage its enabling materials technology to develop products in the area
of microwave, power and lasers while continuing to develop new and improved
products to enhance growth in LEDs, SiC wafers and gemstone crystals.
o EXPAND CAPACITY AND INFRASTRUCTURE. In order to meet anticipated demand for
its existing products and to develop and fabricate new products, the
Company has more than doubled its manufacturing capacity over the last year
and is preparing to support additional growth over the next several years
as needed. In November 1997, the Company acquired its present manufacturing
facility in Durham, North Carolina, a 30-acre site with 172,000 square feet
of manufacturing, warehouse and office space. The Company is currently in
the process of completing the build-out of this facility to increase
capacity, which it expects to finish in July 1999. The Company also intends
to expand its existing facility, construct new facilities and purchase
equipment.
o ENHANCE COMPETITIVE VALUE OF SIC PRODUCTS THROUGH TECHNOLOGICAL ADVANCES.
The Company believes that it can make existing and future products more
competitive than alternative non-SiC products through continued
technological advances. In pursuing this strategy, the Company has
increased the performance and reduced the cost of its LED chips over the
last several years by decreasing die size, increasing wafer diameter and
developing a conductive buffer epitaxial and fabrication process. These
improvements have resulted in LED chip products which provide a low cost
solution for numerous high volume applications. The Company is continuing
SiC development activities to provide improvements in die cost, crystal
quality and device performance.
27
<PAGE>
PRODUCTS
All of Cree's products are an outgrowth of its SiC technology. Cree continually
pursues technical improvements to its existing products to lower cost and
improve quality. The following chart illustrates the Company's existing
products and user applications:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRODUCT USER APPLICATIONS
- -----------------------------------------------------------------------------------------------------
<S> <C>
o Backlighting, such as automotive dashboards and LCD
Blue and green LEDs displays, including wireless handsets
o Large area indoor full color displays, such as arena video
screens
o Large outdoor full color displays
o White light products to replace miniature incandescent
bulbs, such as those used in automobile map lights
o Traffic signals
- -----------------------------------------------------------------------------------------------------
Wafer products o Research and development for new semiconductor
applications
- -----------------------------------------------------------------------------------------------------
SiC crystals o Gemstones
- -----------------------------------------------------------------------------------------------------
</TABLE>
BLUE AND GREEN LEDS
LEDs are solid-state chips used in miniature lamps in everyday applications
such as indicator lights on printers, computers and other equipment. LEDs
generally offer substantial advantages over small incandescent bulbs, including
longer life, lower maintenance and energy consumption, and smaller space
requirements. Groups of LEDs can make up single or multicolor electronic
displays. Prior to the introduction of Cree's blue LED product in 1989, blue
LEDs could not be produced in volumes necessary for commercialization. Since
then, Cree has developed several generations of blue LED products, including a
more robust conductive buffer chip that is easier to build into lamps and has a
lower unit price than competing products. The commercial availability of the
blue LED, together with red and green, has enabled the development of full
color LED lamps and video displays. Strategies Unlimited, an industry research
firm, has estimated that the market size for LEDs (all colors) was
approximately $1.8 billion in 1997 and has forecast that the blue and green LED
portion of the market will increase from approximately $204 million in 1998 to
approximately $430 million in 2001.
Presently, the Company's blue LED chips are used for backlighting purposes,
such as automotive dashboards and LCD displays, including wireless handsets. In
addition, they are used in office equipment indicator lighting, full color
video display technology, such as arena video replay boards, moving message
advertising and informational signs. The Company's standard blue LED products
are primarily used in indoor applications. In September 1998, the Company
introduced brighter blue and green LEDs that offer a lower cost, highly
efficient LED solution for existing applications that require a higher
brightness. For example, many municipalities throughout the U.S. have already
implemented red LEDs into their traffic signals, but have not previously used
green LEDs due to high cost or unavailability. In addition, the Company
believes that there are a large number of existing applications for green LEDs
using lower efficiency materials technology which could be replaced with Cree's
new higher efficiency green LED products.
In November 1998, Cree announced a new product line built on its existing blue
LED products for use in solid-state white light applications. By passing blue
or ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light is converted into white light. Cree is
developing new blue and ultraviolet LEDs designed to maximize conversion
efficiency. The Company anticipates that white light LEDs initially will have
the greatest impact on the market for miniature incandescent lighting, such as
map lights, automobile trunk lights and small flashlights.
WAFER PRODUCTS
Cree manufactures SiC wafers for sale to corporate, government and university
programs that use SiC for developing electronic components. These customers
utilize the material as the basis for research in optoelectronic, microwave and
high power devices. Each order may be sold as a bare wafer or customized
28
<PAGE>
by adding epitaxial films, depending upon the nature of the customer's
development program. For the past several years, the Company has worked to
improve the quality of its wafers while increasing their size. During fiscal
1998, the Company expanded its capabilities to supply two-inch wafers while
achieving a significant improvement in wafer quality.
SIC CRYSTALS FOR GEMSTONE APPLICATIONS
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, Cree manufactures SiC crystals in near colorless form for use in
gemstones. The Company sells SiC crystals to C3, a company which was founded to
develop gemstone products from SiC crystals. C3 cuts and polishes the product
to fabricate diamond-like gemstones targeted at customers who desire affordable
high quality jewelry. During the first half of fiscal 1999, Cree significantly
expanded crystal growth capacity for C3 to meet increased volume requirements.
The potential for increasing demand depends on Cree's ability to meet C3's
requirements for color, clarity and yield. Consequently, Cree has agreed to
focus development efforts on improving its manufacturing processes to increase
crystal size and volume, as well as to develop crystals with higher quality.
Future demand also is dependent on C3's ability to cut, facet and effectively
market its gemstone products.
PRODUCTS UNDER DEVELOPMENT
The Company believes that the inherent physical characteristics of SiC make it
an excellent material for many new semiconductor applications. The Company is
dedicated to creating new applications using SiC and has products currently
under development in each of the areas described below. The following chart
illustrates the potential user applications for each area of product
development:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
- -----------------------------------------------------------------------------------------------------
<S> <C>
o Communication systems for wireless applications, such as
High power radio frequency and PCS base stations
microwave devices o Radar systems
- -----------------------------------------------------------------------------------------------------
Power devices o Industrial motor controls
o Electric vehicles
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
- -----------------------------------------------------------------------------------------------------
Blue and ultraviolet lasers o High density optical storage, such as CD-ROMs and DVDs
- -----------------------------------------------------------------------------------------------------
High temperature devices o Automotive and aerospace electronics
- -----------------------------------------------------------------------------------------------------
</TABLE>
HIGH POWER RADIO FREQUENCY AND MICROWAVE DEVICES
The Company is currently developing SiC-based high power transistors that
operate at radio and microwave frequencies. The Company believes these devices
will have applications in wireless phone base stations, high power solid-state
broadcast systems for television and radio, and radar search and detection
equipment.
Cree is continuing to develop a SiC-based device for use in base stations for
wireless systems. This device can be used for frequency band applications
beginning at 1.8 gigahertz, such as personal communications system ("PCS") base
station networks. The Company believes that SiC transistors will be superior to
current silicon and GaAs-based devices due to greater output power per
transistor. The higher output power available from SiC devices is expected to
allow wireless systems to use fewer transistors per base station resulting in
less complex circuitry and lower cost. In addition, SiC's ability to dissipate
heat more rapidly than other materials reduces the need for costly cooling
equipment. The Company currently anticipates releasing its first product
designed for use in microwave applications during fiscal 1999 for shipment in
the first half of fiscal 2000.
Cree is also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1998, the Company reported the demonstration of GaN on SiC transistors
that, although low in total output power, operated at a power density of 6.8
watts per millimeter at 10 gigahertz. The Company believes this power density
is the highest publicly reported for a
29
<PAGE>
solid-state field-effect transistor operating at radio or microwave frequency
and is substantially higher than that achieved with equivalent silicon or
GaAs-based devices. The Company does not anticipate that a commercial device
capable of emitting power at this level will be available in the near term.
POWER DEVICES
The Company is developing prototype high power devices that have many potential
uses. Such devices could be employed in applications involving power
conditioning as well as power switching. SiC-based power devices have the
potential to handle significantly higher power densities than existing
silicon-based devices. In addition, SiC devices are expected to operate at
significantly higher temperatures and voltages with superior switching
capabilities. These devices are expected to yield substantial power savings due
to reductions in energy losses made possible by the devices' high efficiency.
Potential applications include power drive components for electric vehicles,
lighting ballast components, industrial motor controls and power conditioning
for high voltage power transmission. The Company recently entered into a
three-year project with Kansai Electric Power Company, one of the largest power
companies in the world, for development of SiC-based devices for use in power
transmission networks.
BLUE AND ULTRAVIOLET LASER DIODES
The Company continues to focus on the development of blue and ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent material for blue laser
applications. The storage capacity of optical disk drives can be increased
significantly by utilizing a laser diode capable of emitting short wavelength
light. The Company has demonstrated a laser diode fabricated from GaN and
related materials deposited on SiC substrates that emits blue light, which has
a shorter wavelength than that of the red or infrared lasers used today. The
Company believes that the shorter wavelength of blue light could potentially
result in storage capacity for optical disk drives that is significantly
greater than the capacity permitted by red light. This increased storage
capacity could lead to advances in CD-ROM data storage and audio and video
compact disc applications. Currently, the Company is the only U.S.-based
company to have demonstrated the continuous wave operation of a blue laser
diode at room temperature; however, there is still substantial work needed to
produce a blue laser suitable for commercial applications.
HIGH TEMPERATURE DEVICES
In certain applications for microwave and power devices, the ability of SiC to
operate at higher temperatures than comparable silicon devices can be a major
advantage. Thus, Cree is currently developing high temperature versions of
these devices. These devices would be used for applications in high temperature
environments or environments with limited cooling or heat sinking, including
potential applications in the automotive, energy and aerospace industries. Cree
is also working on high temperature analog and digital circuits that could be
used to amplify low level sensor signals directly in a jet engine or other high
ambient temperature environment. Such devices could also find use in
applications such as down hole drilling equipment. Although Cree has developed
prototype devices, additional development work is needed to achieve commercial
viability.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to maintain its position as a leading
supplier of SiC material and SiC-based semiconductor products, and to expand
the markets for such products, will depend in large part on its ability to
enhance existing products and to continue developing new products incorporating
the latest improvements in SiC technology. Accordingly, the Company is
committed to investing significant resources in research and development.
The Company continually conducts research aimed at improving the quality of its
crystals and wafers and enhancing its epitaxial film deposition (wafer coating)
process. Cree believes that these research and development efforts will benefit
all of the Company's products. The Company believes it can increase the
diameter of its wafers while lowering manufacturing costs and permitting the
development of more complex
30
<PAGE>
devices. The key determinants that will enable the manufacture of more complex
devices, such as power semiconductors, are the substrate quality and wafer
size. Epitaxial thickness, lower defect density and the elimination of
variation are important factors to yield improvement, marketability and lower
cost. In moving to larger wafer sizes, the Company is focusing on how to
stabilize the process to repeatedly grow larger diameter crystals with minimal
defects. The two-inch wafer size, which Cree introduced in fiscal 1998, is
considered a minimum standard for many niche fabrication facilities. Cree also
has begun development of three-inch and larger wafer sizes.
During fiscal years 1998, 1997 and 1996, the Company spent $8.6 million, $9.7
million and $6.3 million, respectively, for direct expenditures relating to
research and development activities. Offsetting these expenditures were $8.2
million, $8.7 million and $5.9 million, respectively, of U.S. Government
funding for direct and indirect research and development expenses. In addition,
certain customers have also sponsored research activities related to the
development of new products. During fiscal years 1998 and 1997, customers spent
$3.5 million and $66,000, respectively, for product research and development
activities. In fiscal 1996, customers did not provide significant funding for
research activities.
SALES AND MARKETING
The Company actively markets its products through targeted mailings,
telemarketing, select advertising and attendance at trade shows. The Company
generally uses an executive sales approach, relying predominantly on the
efforts of senior management and a small direct sales staff for worldwide
product sales. The Company believes that this approach is preferable in view of
its current customer base and product mix, particularly since the production of
lamp and display products incorporating LED chips is concentrated among a
relatively small number of manufacturers. However, the Company departs from
this approach for sales to certain Asian countries. In Japan, the Company
markets its LED products and SiC wafers through its distributors Sumitomo
Corporation ("Sumitomo") and Shin-Etsu. The Company also uses sales
representatives to market its LED products in Hong Kong, China and Korea. The
Company sells SiC crystal materials for use in gemstone applications directly
to C3 under an exclusive supply agreement.
MANUFACTURING AND FACILITIES
The Company operates its own facilities in Durham, North Carolina. Direct
control over SiC crystal growth, wafering, epitaxial deposition, device
fabrication and test operations allows the Company to shorten its product
design and production cycles and to protect its proprietary technology and
processes. In November 1997, the Company acquired its present manufacturing
facility, a 30-acre industrial site in Durham, North Carolina, consisting of a
139,000 square foot production facility and 33,000 square feet of service and
warehouse buildings. The Company is currently in the process of completing the
build-out of this facility to increase capacity. The Company is also in the
process of purchasing a 79-acre site close to its present facility for $1.5
million. The Company anticipates that any additional expansion of capacity in
the near future will occur on these two sites.
The Company currently leases space for some of its manufacturing and research
and development facilities which occupy 21,900 square feet and 3,800 square
feet, respectively, in the same building in Durham, North Carolina. These
leases expire in December 2001 and May 1999, respectively. In addition, the
Company also leases approximately 13,200 square feet in a separate building in
Durham, North Carolina which is used for its device fabrication and test
processes. This lease expires in August 2000.
The Company's products are manufactured in a six-part process which includes:
SiC crystal growth, wafer slicing, polishing, epitaxial deposition,
fabrication, and testing and packaging. SiC crystals are grown using a
proprietary high temperature process designed to produce uniform crystals in a
single crystalline form. Crystals used for moissanite gemstones exit the
manufacturing process at this stage. Crystals used for other products are then
sliced into wafers. The wafers are polished and then processed using the
Company's proprietary epitaxial deposition technology, which essentially
consists of growing a thin layer of SiC, GaN or other material on the polished
wafer, depending on the nature of the device under production. SiC wafer
products may leave the manufacturing process either after polishing or epitaxy.
Following epitaxy, LED chips
31
<PAGE>
are fabricated in a clean room environment. The final steps include testing and
packaging for shipment to the customer. In manufacturing its products the
Company depends substantially on its custom-manufactured equipment and systems,
some of which is manufactured internally and some of which the Company acquires
from third parties and customizes itself.
The Company depends on a limited number of suppliers for certain raw materials,
components and equipment used in its SiC products and LEDs, including certain
key materials and equipment used in its crystal growth, wafering, polishing,
epitaxial deposition, device fabrication and device test processes. The Company
generally purchases these limited source items pursuant to purchase orders and
has no guaranteed supply arrangements with its suppliers. In addition, the
availability of these materials, components and equipment to the Company is
dependent in part on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. The Company endeavors to
maintain ongoing communication with its suppliers to guard against
interruptions in supply and, to date, generally has been able to obtain
adequate supplies in a timely manner from its existing sources. However, any
interruption in the supply of these key materials, components or equipment
could have a significant adverse effect on the Company's operation.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. The
Company believes that it currently enjoys a favorable position in the existing
markets for SiC-based products and materials primarily as a result of its
proprietary SiC-based technology. However, the Company faces actual and
potential competition from a number of established domestic and international
compound semiconductor companies. Many of these companies have greater
engineering, manufacturing, marketing and financial resources than the Company.
The Company's primary competition for the blue and green LED products comes
from Nichia Chemical Industries, Ltd., Toyoda Gosei Co. Ltd. and the
Hewlett-Packard Company which currently market blue and green LED products that
are brighter than the Company's high brightness blue and green LED devices.
These companies have historically been successful in the market for outdoor
display applications because of the brightness demands of outdoor displays, as
well as the decreased price sensitivity of the outdoor display market. Cree
believes its brighter blue and green LEDs will enable it to compete
successfully in this market because they can be used in the same applications
at a lower cost than competing products.
The Company believes that it is positioned to take advantage of the larger
indoor display market because of its lower cost and the advantages of its
design. The Company believes that its approach to manufacturing blue and green
LEDs from SiC substrates offers a more cost-effective design and process than
its competitors, who use a sapphire substrate. Cree's smaller chip design
enables the diode to use less material and permits more devices to be
fabricated on each wafer processed, lowering the cost per unit. In addition,
the Company's device enables manufacturers to package the LED on the same
production line as other green and red LEDs, eliminating the need for special
equipment necessary for chips made from sapphire substrates. Furthermore,
Cree's SiC-based devices can withstand a much higher level of electrostatic
discharge ("ESD") than existing sapphire-based products and therefore are more
suitable for applications that require high ESD emission ratings, such as
automotive applications.
PATENTS AND PROPRIETARY RIGHTS
The Company has an exclusive license to 10 U.S. patents from N.C. State, and
holds 43 additional domestic patents of its own or owned jointly. In key
foreign markets, Cree holds exclusive licenses to patents issued on the N.C.
State technology and owns patents issued on Cree applications which are
counterparts to the U.S. patents. The Company also holds licenses or rights to
acquire exclusive licenses to inventions owned by N.C. State, the University of
California and Purdue Research Foundation which are subject to pending patent
applications. Cree has 25 patent applications of its own pending in the U.S.
and also has 85 foreign patent applications pending. In addition to its patent
rights, the Company relies upon proprietary know-how and
32
<PAGE>
trade secrets relating to its manufacturing processes and devices and has
entered into non-disclosure agreements to protect its proprietary technology
with both employees and parties outside of the Company.
The Company earns a material amount of its revenues in overseas markets. While
the Company holds and has applied for patent protection for certain of its
technologies and products in some of these markets, there can be no assurance
that the Company's intellectual property rights will provide adequate
protection in all commercially significant markets.
THE N.C. STATE LICENSE. In 1987, the Company entered into a license agreement
with N.C. State pursuant to which the Company was granted a worldwide, fully
paid, exclusive license to manufacture, use and sell products and processes
covered by the claims of 10 U.S. patent applications filed by N.C. State
relating to SiC materials and SiC-based semiconductor devices, some of which
also have been filed in foreign countries. Ten patents were subsequently issued
with respect to eight of those applications, with expiration dates between 2007
and 2009. Twelve of the foreign filings have been issued with expiration dates
from 2006 through 2013. Included in the licensed patents are patents practiced
by the Company to grow single crystal SiC. The U.S. patent for this process
expires in 2007 and in other markets the comparable patents expire between 2006
and 2012. Under the terms of the license, the U.S. Office of Naval Research has
retained an interest in the licensed technology for certain military
applications.
CREE'S PATENTS. Since its inception, the Company has been granted 43 U.S.
patents of its own or jointly owned. These patents expire between 2008 and
2016. The Company has filed a number of these patent applications in foreign
countries, many of which have been issued. In addition, the Company has, in the
past, entered into joint research and development programs to develop new
SiC-based devices. These efforts have resulted in four jointly-owned patents,
one with Purdue University, two with General Electric Company and one with N.C.
State.
The Company intends to continue to file patent applications in the future,
where appropriate, and to pursue such applications with U.S. and foreign patent
authorities, but the Company cannot be sure that any patents will be issued on
such applications or that the Company patents will not be contested. In the
past, one of the important patents the Company licenses from N.C. State
relating to crystal growth was subject to re-examination in the U.S. but the
Company prevailed in the proceeding. Currently, the corresponding European
patent is being challenged, which means that the Company could lose patent
protection in certain European countries for this particular method. Also,
because issuance of a valid patent does not prevent other companies from using
alternative, non-infringing technology, there can be no assurance that any of
the Company's patents (or patents issued to N.C. State or other parties and
licensed to the Company) will provide significant commercial protection.
Although the Company believes that its products do not infringe on the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products or that such assertion may not
require the Company to enter into royalty arrangements, prevent the Company
from selling products, or result in protracted or costly litigation.
Because of rapid technological developments in the semiconductor industry, the
patent position of any semiconductor device manufacturer, including that of the
Company, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, although the Company holds certain patents, is licensed
under other patents, and is currently pursuing additional patent applications,
there can be no assurance that patents will be issued from any pending
applications or that claims allowed by any existing or future patents issued or
licensed to the Company will not be challenged, invalidated, or circumvented,
or that any rights granted under such patents will provide adequate protection
to the Company.
EMPLOYEES
As of December 27, 1998, the Company employed 297 people, including 214 in
manufacturing operations, 51 in research and development, and 32 in sales and
general administration. None of the Company's employees is represented by a
labor union or subject to collective bargaining agreements. The Company
believes relations with its employees are strong.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
F. Neal Hunter (1) ........................ 36 Chairman and Chief Executive Officer
Charles M. Swoboda ........................ 32 President and Chief Operating Officer
Calvin H. Carter, Jr., Ph.D. (2) .......... 43 Executive Vice President, Director of Materials Technology
and Director
Cynthia B. Merrell ........................ 38 Chief Financial Officer and Treasurer
John W. Palmour, Ph.D. .................... 38 Director and Director of Advanced Devices
James E. Dykes (1)(3) ..................... 61 Director
Michael W. Haley (2)(3) ................... 60 Director
Walter L. Robb, Ph.D (3). ................. 70 Director
Dolph W. von Arx (1)(2)(3) ................ 64 Director
</TABLE>
- -------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
MR. HUNTER, a co-founder of the Company, has served as Chairman of the
Company's Board of Directors since 1995, as the Company's Chief Executive
Officer since 1994 and as a Director since the Company's inception in 1987. Mr.
Hunter also served as President from 1994 until January 14, 1999. Prior to his
election as President and Chief Executive Officer in 1994, Mr. Hunter served as
Vice President of Marketing with responsibility for the management of the
Company's optoelectronic products and as the Company's Secretary and Treasurer.
He received a B.S. degree in mechanical engineering from N.C. State.
MR. SWOBODA became President effective January 14, 1999 and has served as Chief
Operating Officer of the Company since June 1997. Prior to becoming President,
Mr. Swoboda also held the title of Vice President since June 1997. Mr. Swoboda
joined the Company in 1993 and served as the Company's Operations Manager from
July 1996 to June 1997, as Wafer Fab Manager from April 1996 to July 1996, as
General Manager of the Company's subsidiary, Real Color Displays, Inc., from
August 1994 to April 1996 and as LED Product Manager from July 1993 to August
1994. Prior to 1993, he was employed by Hewlett-Packard Company, an electronics
company. Mr. Swoboda received a B.S. degree in electrical engineering from
Marquette University.
DR. CARTER, a co-founder of the Company, has served as a Director and Vice
President since Cree's inception. He currently holds the positions of Executive
Vice President and Director of Materials Technology. As Director of Materials
Technology, Dr. Carter is responsible for the Company's development of advanced
materials growth technology, including the growth of SiC material for
semiconductor and other applications. He previously served as Vice President,
New Product Development from 1995 to 1997 and as Director of Technology from
1987 to 1995. Dr. Carter holds B.S., M.S. and Ph.D. degrees in materials
science and engineering from N.C. State.
MS. MERRELL was named Chief Financial Officer and Treasurer effective July 1998
after serving as the Company's Interim Chief Financial Officer and Assistant
Treasurer since January 1998. Ms. Merrell joined the Company in 1996, initially
serving as its Controller. From January 1992 to November 1996 she was employed
as the controller of Kaset International, a subsidiary of The Times Mirror
Company engaged in providing training, consulting and project management
services in the field of customer relations. Ms. Merrell's prior financial
experience includes service in various capacities with Tropicana Products, Inc.
and the accounting firm of Arthur Andersen & Co. She received a B.S. degree in
accounting from the University of Florida and is licensed as a Certified Public
Accountant in Florida.
34
<PAGE>
DR. PALMOUR, a co-founder of the Company, currently serves as Director of
Advanced Devices and, in that capacity, is responsible for the Company's
development of advanced SiC devices such as microwave transistors and power
devices. Dr. Palmour has served as a Director of the Company since October 1995
and previously served on the Company's Board of Directors from October 1992 to
April 1993. During the period from 1993 to 1995 that Dr. Palmour was not a
Director, he continued to be employed by the Company. Dr. Palmour received his
B.S. and Ph.D. degrees from N.C. State in the fields of materials science and
engineering.
MR. DYKES became a Director of the Company in January 1992. He served as
Executive Vice President of Thomas Group, Inc., a publicly held management
consulting group, from July 1997 through June 1998 and from 1994 to 1997 served
as President and Chief Executive Officer of Intellon Corp., a privately held
start-up company in the home automation industry. From January 1989 until his
retirement in December 1992, Mr. Dykes served as President and Chief Executive
Officer of Signetics Company, a subsidiary of North American Philips
Corporation. Mr. Dykes received a B.S. degree in electrical engineering from
the University of Florida. He is currently a director of EXAR Corporation and
Thomas Group, Inc.
MR. HALEY became a Director of the Company in April 1989. He serves as Chairman
and Chief Executive Officer of Triton Management Company based in Greensboro,
North Carolina, which previously owned and operated 60 restaurants and has been
engaged principally in investment and property management since the sale of the
restaurants in 1993 and 1996. Mr. Haley graduated from the University of North
Carolina-Chapel Hill, where he received a bachelor's degree in business
administration.
DR. ROBB became a Director of the Company in April 1993. He is currently the
President of Vantage Management, Inc., a consulting and investment firm in
Schenectady, New York. From 1986 through 1992, Dr. Robb served as a Senior Vice
President for Corporate Research and Development for General Electric Company,
a diversified technology company. From 1951 to 1986, he held various other
positions with General Electric Company. Dr. Robb received a B.S. degree from
Pennsylvania State University and M.S. and Ph.D. degrees from the University of
Illinois. All of Dr. Robb's degrees were awarded in chemical engineering. He is
currently a Director of Celgene Corporation, Neopath, Inc. and Mechanical
Technology Incorporated.
MR. VON ARX became a Director of the Company in October 1991. He served as the
Non-Executive Chairman of Morrison Restaurants Inc. from January 1996 to July
1998 and is the former Chairman, President and Chief Executive Officer of
Planters LifeSavers Company, an affiliate of RJR Nabisco, Inc., where he served
in such capacities for four years prior to his retirement in 1991. Mr. von Arx
is a graduate of Washington University, where he received a bachelor's degree.
He is currently a Director of Ruby Tuesday, Inc., International Multifoods
Corporation, MacKenzie Investment Management, Inc. and BMC Fund, Inc.
35
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 27, 1998, except as
otherwise noted below, and as adjusted to reflect the sale of the shares
offered hereby: (i) by each person known by the Company to own beneficially
more than five percent of the Common Stock; (ii) by each Director; (iii) by
each executive officer; and (iv) by all Directors and executive officers of the
Company as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares
of Common Stock owned by them, except to the extent such power may be shared
with a spouse.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING(2) THE OFFERING(2)
------------------------ -----------------------
DIRECTORS AND EXECUTIVE OFFICERS(1) NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------------------ ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Michael W. Haley (3) ................................................ 475,914 3.7% 475,914 3.3%
Dolph W. von Arx (4) ................................................ 314,160 2.4% 314,160 2.2%
F. Neal Hunter (5) .................................................. 295,786 2.3% 295,786 2.1%
John W. Palmour, Ph.D. (6) .......................................... 289,500 2.2% 289,500 2.0%
Calvin H. Carter, Jr., Ph.D. (7) .................................... 256,030 2.0% 256,030 1.8%
Walter L. Robb, Ph.D. (8) ........................................... 170,000 1.3% 170,000 1.2%
Charles M. Swoboda (9) .............................................. 58,200 * 58,200 *
James E. Dykes (10) ................................................. 56,000 * 56,000 *
Cynthia B. Merrell (11) ............................................. 12,400 * 12,400 *
All Directors and executive officers as a group (9 persons) ......... 1,927,990 14.3% 1,927,990 13.0%
5% SHAREHOLDERS
- -------------------------------------------------------------------------
Trustees of General Electric Pension Trust (12) ..................... 1,279,967 9.9% 1,279,967 9.0%
Freiss Associates, Inc. (13) ........................................ 750,000 5.8% 750,000 5.3%
D.L. Carlson Investment Group, Inc. (14) ............................ 683,995 5.3% 683,995 4.8%
</TABLE>
- -------------------
* Represents less than one percent.
(1) Unless otherwise indicated, the address of the Directors and executive
officers named above is the same as the Company's address at 4600 Silicon
Drive, Durham, North Carolina 27703.
(2) Based on 12,919,818 shares of common stock outstanding on December 27, 1998
and 14,219,818 shares of common stock outstanding immediately after the
offering. Pursuant to the rules of the Commission, certain shares of Cree's
common stock which a person has the right to acquire within 60 days pursuant
to the exercise of stock options and warrants are deemed to be outstanding
for the purpose of computing beneficial ownership and the percentage
ownership of that person but are not deemed outstanding for purposes of
computing the percentage ownership of any other person. All Directors and
executive officers as a group hold options to purchase an aggregate of
587,966 shares of common stock. Unless otherwise noted, the Company believes
that all persons named in the table have sole voting and investment power
with respect to all shares of common stock that are beneficially owned by
them.
(3) Includes options to purchase 68,000 shares of common stock. Also includes
20,000 shares held by a charitable foundation of which Mr. Haley is a
director. Mr. Haley holds shared voting and investment power over these
shares but disclaims beneficial ownership.
(4) Includes options to purchase 94,000 shares of common stock. Mr. von Arx
disclaims voting and investment power over these shares.
(5) Includes options to purchase 115,786 shares of common stock.
(6) Includes options to purchase 66,000 shares of common stock. Also includes
10,000 shares held by Dr. Palmour's spouse. Dr. Palmour disclaims voting and
investment power over these shares.
(7) Includes options to purchase 54,780 shares of common stock. Also includes
51,030 shares held by members of Dr. Carter's immediate family. Dr. Carter
disclaims voting and investment power over these shares.
(8) Includes options to purchase 77,000 shares of common stock. Also includes
43,000 shares held by a trust of which Dr. Robb is a trustee. Dr. Robb holds
shared voting and investment power over these shares but disclaims
beneficial ownership.
(9) Includes options to purchase 58,000 shares of common stock.
36
<PAGE>
(10) Includes options to purchase 42,000 shares of common stock.
(11) Includes options to purchase 12,400 shares of common stock.
(12) Based on a Form 13G filed with the Securities and Exchange Commission
filed February 19, 1997. Includes warrants to purchase 12,500 shares of
common stock. Trustees of General Electric Pension Trust's address is 3003
Summer Street, Stamford, Connecticut 06904.
(13) Based on a Form 13F filed with the Securities and Exchange Commission for
the period ended September 30, 1998. Freiss Associates, Inc.'s address is
3908 Kennett Pike, P.O. Box 4166, Greenville, Delaware 19807.
(14) Based on a Form 13F filed with the Securities and Exchange Commission for
the period ended September 30, 1998. D.L. Carlson Investment Group, Inc.'s
address is 101 N. State Street, Concord, New Hampshire 03301.
37
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to a supply agreement originally entered into in 1995 and subsequently
amended and restated, the Company has agreed to supply SiC to C3 on an
exclusive basis for use in the fabrication of gemstones, and C3 has agreed to
purchase certain of its requirements for such material from the Company. In
related development agreements executed in July 1997 and January 1998, and
subsequently amended and restated, the Company has agreed to develop improved
processes for manufacturing large volume, colorless SiC material for sale to
C3. In addition, the Company and C3 are parties to an agreement executed in
February 1996 under which the Company supplies certain electronic devices to C3
for use in gemstone testing equipment. During the fiscal year ended June 28,
1998, C3 purchased approximately $4.5 million in products and services from the
Company under these agreements.
The Company and C3 are also parties to an agreement executed in May 1998 under
which C3 purchased certain equipment constructed by the Company which the
Company retains for use in manufacturing SiC crystals for sale to C3. The
purchase price of the equipment was based on the Company's costs plus a
reasonable allocation of overhead, subject to an agreed maximum price of $3.4
million. Under the terms applicable to the purchase, C3 is obligated to
transfer title to the equipment to the Company once it is fully depreciated.
Certain of the Company's Directors and executive officers own approximately
169,000 shares of C3 common stock, representing less than 2.4% of C3's
outstanding common stock. In addition, C. Eric Hunter and Jeff N. Hunter,
brothers of Cree's Chairman and Chief Executive Officer, F. Neal Hunter,
beneficially own approximately 12% of the outstanding common stock of C3. Jeff
Hunter is the Chairman and Chief Executive Officer of C3. The Company also owns
less than 1% of the outstanding shares of common stock of C3.
38
<PAGE>
UNDERWRITING
The Company has entered into an underwriting agreement with the underwriters
named below. CIBC Oppenheimer Corp., Prudential Securities Incorporated and
Morgan Keegan & Company, Inc. are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------ -----------------
<S> <C>
CIBC Oppenheimer Corp. ............................ 540,000
Prudential Securities Incorporated ................ 420,000
Morgan Keegan & Company, Inc. ..................... 240,000
Marion Bass Securities Corporation ................ 20,000
Natcity Investments, Inc. ......................... 20,000
Paulson Investment Company, Incorporated .......... 20,000
Preferred Capital Markets, Inc. ................... 20,000
H.G. Wellington & Co. Inc. ........................ 20,000
-------
Total ......................................... 1,300,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised Cree that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$1.20 per share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of $0.10 per share to certain other dealers. After
the shares are released for sale to the public, the representatives may change
the offering price and other selling terms at various times.
The Company has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 195,000 additional shares
from the Company to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the total price
to public will be $58.9 million, and the total proceeds to the Company will be
$55.8 million. The underwriters have severally agreed that, to the extent the
over-allotment option is exercised, they will each purchase a number of
additional shares proportionate to the underwriter's initial amount reflected
in the foregoing table.
39
<PAGE>
The following table provides information regarding the amount of the discount
to be paid to the underwriters by the Company:
<TABLE>
<CAPTION>
TOTAL
-------------------------------------
WITH FULL
WITHOUT EXERCISE EXERCISE OF
PER SHARE OF OVER-ALLOTMENT OVER-ALLOTMENT
----------- ------------------- ---------------
<S> <C> <C> <C>
$ 2.07 $2,691,000 $3,094,650
</TABLE>
The Company estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $650,000.
The Company has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
The Company and its executive officers and directors have agreed to a 90-day
"lock up" with respect to approximately 1,927,990 shares of common stock and
certain other Company securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that,
subject to certain exceptions, for a period of 90 days following the date of
this prospectus, the Company and such persons may not offer, sell, pledge or
otherwise dispose of these securities without the prior written consent of CIBC
Oppenheimer Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
o Stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
o Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
o Penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
o Passive market making -- Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to certain limitations, until the time, if ever, at which a stabilizing bid
is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither the Company nor the underwriters make any representation or prediction
as to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
40
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon for
the Company by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
2500 First Union Capitol Center, Raleigh, North Carolina 27601. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Hale and Dorr LLP, 60 State Street, Boston, Massachusetts
02109.
EXPERTS
The consolidated balance sheets as of June 30, 1997 and June 28, 1998, and the
consolidated statements of operations, cash flow and shareholders equity for
the two years in the period ended June 30, 1997, and for the year ended June
28, 1998, included in this prospectus have been included herein in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
OTHER MATTERS
In September 1998, the Company retained Ernst & Young LLP as its independent
public accountants and dismissed the Company's former auditors. In connection
with its audits for the two most recent fiscal years prior to dismissal and
through the date of its dismissal, there were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if
not resolved to the satisfaction of the former auditors, would have caused it
to make reference to the subject matter of the disagreement in connection with
its report on the financial statements of the Company for such periods. The
former auditors' reports on the Company's financial statements contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. Prior to retaining Ernst
& Young LLP, the Company had not consulted with Ernst & Young LLP on any
accounting, auditing or reporting matter.
WHERE YOU CAN FIND MORE INFORMATION
The Company has filed a registration statement on Form S-3 with the Securities
and Exchange Commission in connection with this offering. In addition, the
Company files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
the registration statement and any other documents filed by the Company at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference
Room. The Company's Securities and Exchange Commission filings are also
available to the public at the Securities and Exchange Commission's Internet
site at "http://www.sec.gov".
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of the Company,
the reference may not be complete and you should refer to the exhibits that are
a part of the registration statement for a copy of the contract or document.
The Securities and Exchange Commission allows the Company to "incorporate by
reference" into this prospectus the information the Company files with it,
which means that the Company can disclose important information to you by
referring you to those documents. Information incorporated by reference is part
of this prospectus. Later information filed with the Securities and Exchange
Commission will update and supersede this information.
41
<PAGE>
The Company incorporates by reference the documents listed below and any future
filings made with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering
is completed:
o Annual Report on Form 10-K for the year ended June 28, 1998, as amended by
Form 10-K/A.
o Quarterly Reports on Form 10-Q for the quarters ended September 27, 1998
and December 27, 1998.
o Current Report on Form 8-K dated September 21, 1998, as amended by Form
8-K/A on September 30, 1998.
o The description of the Company's common stock contained in its
registration statement on Form 8-A filed with the Commission under Section
12 of the Securities Exchange Act of 1934.
You may request a copy of these filings, at no cost, by contacting the Company
at:
Cree Research, Inc.
4600 Silicon Drive
Durham, North Carolina 27703
Attention: Investor Relations Manager
Telephone: (919) 313-5300
42
<PAGE>
CREE RESEARCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTERIM FINANCIAL STATEMENTS -- UNAUDITED
Consolidated Balance Sheets as of June 28, 1998 (audited) and December 27, 1998 ...... F-2
Consolidated Statements of Income for the six months ended December 28, 1997 and
December 27, 1998 .................................................................. F-3
Consolidated Statements of Cash Flow for the six months ended December 28, 1997 and
December 27, 1998 .................................................................. F-4
Consolidated Statements of Shareholders' Equity for the year ended June 28, 1998
(audited) and for the six months ended December 27, 1998 ........................... F-5
Notes to Consolidated Financial Statements ........................................... F-6
ANNUAL FINANCIAL STATEMENTS
Report of Independent Accountants .................................................... F-12
Consolidated Balance Sheets as of June 30, 1997 and June 28, 1998 .................... F-13
Consolidated Statements of Operations for the years ended June 30, 1996 and 1997, and
June 28, 1998 ...................................................................... F-14
Consolidated Statements of Cash Flow for the years ended June 30, 1996 and 1997, and
June 28, 1998 ...................................................................... F-15
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996 and
1997, and June 28, 1998 ............................................................ F-16
Notes to Consolidated Financial Statements ........................................... F-17
</TABLE>
F-1
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 27,
1998 1998
---------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $17,680 $12,769
Marketable securities .................................................... 657 905
Accounts receivable, net ................................................. 10,479 12,110
Inventories .............................................................. 2,543 3,402
Deferred income tax ...................................................... 1,952 264
Prepaid expenses and other current assets ................................ 1,347 691
------- -------
Total current assets ................................................... 34,658 30,141
Property and equipment, net .............................................. 36,476 44,972
Patent and license rights, net ........................................... 1,525 1,641
Other assets ............................................................. 65 1,349
------- -------
Total assets ........................................................... $72,724 $78,103
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade .................................................. $ 5,595 $ 4,097
Current maturities of long term debt ..................................... 17 121
Accrued salaries and wages ............................................... 391 550
Other accrued expenses ................................................... 1,052 990
------- -------
Total current liabilities .............................................. 7,055 5,758
Long term liabilities:
Long term debt ........................................................... 8,650 9,879
Deferred income tax ...................................................... 2,154 2,477
------- -------
Total long term liabilities ............................................ 10,804 12,356
Shareholders' equity:
Preferred stock, par value $0.01; 2,750 shares authorized at June 28, 1998
and 3,000 shares authorized at December 27, 1998; none issued and
outstanding ............................................................ -- --
Common stock, $0.005 par value; 14,500 shares authorized at June 28,
1998 and 30,000 shares authorized at December 27, 1998; shares issued
and outstanding 12,989 and 12,920 at June 28, 1998 and December 27,
1998, respectively ..................................................... 65 65
Additional paid-in-capital ............................................... 49,676 49,583
Retained earnings ........................................................ 5,124 10,341
------- -------
Total shareholders' equity ............................................. 54,865 59,989
------- -------
Total liabilities and shareholders' equity ............................ $72,724 $78,103
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Product revenue, net ...................... $ 16,369 $ 23,525
Contract revenue, net ..................... 3,944 2,792
-------- --------
Total revenue ........................... 20,313 26,317
Cost of revenue:
Product revenue ........................... 10,365 11,792
Contract revenue .......................... 3,252 2,252
-------- --------
Total cost of revenue ................... 13,617 14,044
-------- --------
Gross profit ............................... 6,696 12,273
Operating expenses:
Research and development .................. 920 1,927
Sales, general and administrative ......... 1,985 2,668
Other expense ............................. 390 567
-------- --------
Income from operations .................. 3,401 7,111
Interest income, net ....................... 332 135
-------- --------
Income before income taxes .............. 3,733 7,246
Income tax expense ......................... 1,093 2,029
-------- --------
Net income .............................. $ 2,640 $ 5,217
======== ========
Earnings per share:
Basic ................................... $ 0.21 $ 0.41
======== ========
Diluted ................................. $ 0.20 $ 0.39
======== ========
Shares used in per share calculation:
Basic ................................... 12,699 12,876
======== ========
Diluted ................................. 13,522 13,541
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
-------------- -------------
<S> <C> <C>
(UNAUDITED)
Operating activities:
Net income .......................................................... $ 2,640 $ 5,217
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 2,067 2,341
Loss on disposal of property, equipment and patents ............... 320 951
Amortization of patent rights ..................................... 50 56
Amortization and write off of goodwill ............................ 86 --
Proceeds from sale of marketable trading securities ............... -- 489
Purchase of marketable trading securities ......................... (1,500) (232)
Gain on marketable trading securities ............................. -- (116)
Changes in operating assets and liabilities:
Accounts receivable ............................................... (2,258) (1,964)
Inventories ....................................................... 1,161 (859)
Prepaid expenses and other assets ................................. 148 1,004
Accounts payable, trade ........................................... (783) (3,073)
Accrued expenses .................................................. 889 420
----------- ---------
Net cash provided by operating activities ......................... 2,820 4,234
----------- ---------
Investing activities:
Purchase of property and equipment .................................. (5,704) (10,380)
Proceeds from sale of property and equipment ........................ 340 189
Purchase of patent rights ........................................... (200) (194)
----------- ---------
Net cash used in investing activities ............................ (5,564) (10,385)
----------- ---------
Financing activities:
Proceeds from issuance of long-term debt ............................ 3,259 1,333
Net proceeds from issuance of common stock .......................... 2,139 2,527
Receipt of Section 16(b) common stock profits ....................... -- 594
Repurchase of common stock .......................................... -- (3,214)
----------- ---------
Net cash provided by financing activities ........................ 5,398 1,240
----------- ---------
Net increase (decrease) in cash and cash equivalents ................. 2,654 (4,911)
Cash and cash equivalents:
Beginning of period ................................................. 10,448 17,680
----------- ---------
End of period ....................................................... $ 13,102 $ 12,769
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized .................. $ -- $ 275
=========== =========
Cash paid for income taxes .......................................... $ 219 $ 1,396
=========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 28, 1998 AND THE SIX MONTHS ENDED DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED TREASURY SHAREHOLDERS'
PAR VALUE CAPITAL EARNINGS STOCK EQUITY
----------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 -- (audited) ................... $62 $ 46,214 $ (1,151) $ -- $ 45,125
Common stock options exercised for cash, 217
shares ................................................. 1 1,693 -- -- 1,694
Common stock warrants exercised for cash, 331
shares ................................................. 2 1,240 -- -- 1,242
Purchase of common stock for the treasury, 82
shares ................................................. -- -- -- (1,262) (1,262)
Retirement of 82 treasury shares ........................ -- (1,262) -- 1,262
Income tax benefits from stock option exercises ......... -- 1,791 -- -- 1,791
Net income .............................................. 6,275 -- 6,275
-------- -------- --------
Balance at June 28, 1998 -- (audited) ................... 65 49,676 5,124 -- 54,865
Common stock options exercised for cash, 100
shares ................................................. 1 745 -- -- 746
Common stock warrants exercised for cash, 65
shares ................................................. -- 1,781 -- -- 1,781
Receipt of Section 16(b) common stock profits ........... -- 594 -- -- 594
Purchase and retirement of 235 treasury shares .......... (1) (3,213) -- -- (3,214)
Net income .............................................. -- -- 5,217 -- 5,217
----- -------- -------- -------- --------
Balance at December 27, 1998 -- (unaudited) ............. $65 $ 49,583 $ 10,341 $ -- $ 59,989
===== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated balance sheet as of December 27, 1998, the consolidated
statements of income for the six months ended December 28, 1997 and December
27, 1998, the consolidated statements of cash flow for the six months ended
December 28, 1997 and December 27, 1998, and the consolidated statement of
shareholders' equity for the six months ended December 27, 1998 have been
prepared by the Company and have not been audited. In the opinion of
management, all normal and recurring adjustments necessary to present fairly
the financial position, results of operations and cash flows at December 27,
1998, and all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included elsewhere herein. The results of operations for the period
ended December 27, 1998 are not necessarily indicative of the operating results
that may be attained for the entire fiscal year.
ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday
in the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 1999. In fiscal 1998, the Company changed its fiscal year from
the twelve months ending June 30, to the 52 week period ending on the last
Sunday in the month of June. The Company's current fiscal year will extend from
June 29, 1998 to June 27, 1999.
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). This statement requires certain securities to
be classified into three categories:
(1) Securities Held-to-Maturity -- Debt securities that the entity has
the positive intent and ability to hold to maturity are reported at
amortized cost.
(2) Trading Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are reported
at fair value, with unrealized gains and losses included in earnings.
(3) Securities Available-for-Sale -- Debt and equity securities not
classified as either securities held-to-maturity or trading securities are
reported at fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity.
The Company's short-term investments are comprised of equity securities that
are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at December 27, 1998, with
net realized and unrealized gains and losses included in net earnings.
As of December 27, 1998, short-term investments consist of common stock
holdings in C3, the majority of which were purchased in November 1997 and
September 1998. The Company's CEO has, through a binding agreement, promised to
indemnify the Company for losses of up to $450,000 for the net difference
between the aggregate cash consideration paid by Cree for the shares of C3
common stock and the cash proceeds received by Cree upon the sale of C3 common
shares. This indemnity covers losses that may result from the sale of shares
purchased in November 1997 and September 1998 below the purchase price paid,
offset by gains realized on shares acquired directly from C3 in January 1997
(see below). Payment of this obligation is due within ten days after receipt by
the CEO of the Company's written demand made pursuant to a vote of the majority
of the members of the Board of Directors other than the CEO. Realized losses on
shares of C3
F-6
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
stock sold by the Company were $254,000 and $46,000, for fiscal 1998 and 1999,
respectively. At December 27, 1998, a net unrealized gain, including shares
acquired directly from C3 (see below), of $383,000 was recognized to bring the
valuation of shares held to market. Therefore, the Company recorded
approximately $116,000 of other income in the six months ended December 27,
1998. Approximately $32,000 of net losses were recorded to other income
(expense) in fiscal 1998. Since the net unrealized gain on shares held exceeded
realized losses on shares sold, there was no receivable recorded from the CEO
as of December 27, 1998.
In addition to the shares of C3 purchased in November 1997 and September 1998,
the Company acquired 24,601 shares of C3 common stock in January 1997. These
shares were issued pursuant to an option C3 granted to the Company in 1995. The
option gave the Company the right to acquire, for an aggregate consideration of
$500, one percent of the outstanding common stock of C3. C3 retained the right
to waive the consideration and issue the stock at any time, which it elected to
do in January 1997. The shares issued pursuant to the option are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933,
which permits the sale of such securities without registration if certain
conditions are met. The shares first became eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
LONG TERM DEBT
The Company obtained a term loan from a commercial bank of up to $10,000,000 to
finance the purchase and upfit of a production facility and service and
warehouse buildings in November 1997. As of December 27, 1998 the entire
$10,000,000 loan was outstanding, including a current portion of $121,000 and a
long term amount of $9,879,000. The loan, which is collateralized by the
purchased property, accrues interest at a fixed rate of 8% and carries
customary covenants, including the maintenance of a minimum tangible net worth
and other requirements. Accrued interest is due monthly until May 1999, at
which time the outstanding principal balance will be amortized over twenty
years until 2011, when the loan balance becomes due.
During the six months ended December 27, 1998, the Company capitalized interest
on funds used to construct property, plant and equipment in connection with the
facility. Interest capitalized for the six months ended December 27, 1998 was
$118,000.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out (FIFO) method. Inventories consist of the
following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 27,
1998 1998
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ............ $ 999 $1,338
Work-in-progress ......... 752 1,220
Finished goods ........... 792 844
------ ------
Total Inventory ......... $2,543 $3,402
====== ======
</TABLE>
RESEARCH AND DEVELOPMENT ACCOUNTING POLICY
The U.S. Government provides funding for several of the Company's current
research and development efforts. The contract funding may be based on a
cost-plus or a cost-share arrangement. The amount of funding under each
contract is determined based on cost estimates that include direct costs, plus
an allocation for research and development, general and administrative and cost
of capital expenses. Cost-plus funding is determined based on actual costs plus
a set percentage margin. For cost-share contracts, the actual costs are
F-7
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
divided between the U.S. Government and the Company based on the terms of the
contract. The government's cost share is then paid to the Company. Activities
performed under these arrangements include research regarding silicon carbide
and gallium nitride materials. The contracts typically require submission of a
written report to document the results of such research.
The revenue and expense classification for contract activity is determined
based on the nature of the contract. For contracts where the Company
anticipates that funding will exceed direct costs over the life of the
contract, funding is reported as contract revenue and all direct costs are
reported as costs of contract revenue. For contracts under which the Company
anticipates that direct costs will exceed amounts to be funded over the life of
the contract, costs are reported as research and development expenses and
related funding as an offset of those expenses. The following table details
information about contracts for which direct expenses exceed funding by period
as included in research and development expenses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net R&D costs ......................... $281 $0
Government funding .................... 598 0
---- --
Total direct costs incurred ......... $879 $0
==== ==
</TABLE>
As of December 27, 1998, all funding under contracts where the Company
anticipates that direct costs will exceed amounts to be funded has been
exhausted. Therefore, the Company anticipates that all future funding under
existing contracts will be reflected as contract revenue while direct costs
will be reported as contract cost of revenue.
SIGNIFICANT SALES CONTRACT
In September 1996, the Company entered into a Purchase Agreement with Siemens
AG ("Siemens"), pursuant to which Siemens agreed to purchase LED chips made
with the Company's gallium nitride-on-silicon carbide technology. In April 1997
and December 1997, contract amendments were executed that provided for enhanced
product specifications requested by Siemens and larger volume requirements,
respectively.
In September 1998, the Company and Siemens further amended the contract to
extend the Purchase Agreement with respect to shipments to be made on or after
June 29, 1998. The third amendment obligates the Company to ship, and Siemens
to purchase, stipulated quantities of both conductive buffer and new high
brightness LED chips and silicon carbide wafers through fiscal 1999. The
agreement also limits Siemen's right to defer shipments to 30% of scheduled
quantities for items to be shipped in more than 24 weeks after initial notice
and 10% of scheduled quantities for items to be shipped in more than 12 weeks.
In both cases, Siemens would be required to accept all product within 90 days
of the original shipment date. Additionally, the amendment provides for higher
per unit prices early in the contract with reductions in unit prices being
available as the cumulative volume shipped increases.
In December 1998, the Company and Siemens further amended the contract to
include greater quantities of conductive buffer LED chips to be shipped during
fiscal 1999 and extend the contract for these shipments through September 1999.
This amendment also provides for higher per unit prices early in the contract
with reductions in unit prices being available as the cumulative volume shipped
increases. As was the case with the third amendment, these higher prices were
negotiated by the Company to offset higher per unit costs expected earlier in
the contract.
F-8
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INCOME TAXES
The Company has established an estimated tax provision based upon an effective
rate of 28%. The estimated tax rate was based on tax reduction strategies being
implemented by the Company. The estimated effective rate was based upon
projections of income for the fiscal year and the Company's ability to utilize
remaining net operating loss carryforwards and other tax credits. However, the
actual effective rate may vary depending upon actual pre-tax book income for
the year or other factors.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled.
The actual income tax expense attributable to earnings for the six months ended
December 27, 1998 differed from the amounts computed by applying the statutory
U.S. Federal tax rate of 35% to pretax earnings as a result of the following:
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Federal income tax provision at statutory rate ......... $2,536 35.0%
State tax provision .................................... 174 2.4
Decrease in income tax expense resulting from:
Foreign sales corporation ........................... (306) (4.2)
State tax incentives ................................ (167) (2.3)
Research and development credits .................... (85) (1.2)
Change in valuation allowance ....................... (123) (1.7)
------ ----
Income tax expense ..................................... $2,029 28.0%
====== ====
</TABLE>
The following are the components of the provision for income taxes for the six
months ended December 27, 1998 (in thousands):
<TABLE>
<S> <C>
Current:
Federal ........................ $1,182
State .......................... 175
------
Total current portion ........... 1,357
Deferred:
Federal ........................ 782
State .......................... (110)
------
Total deferred portion .......... 672
------
Net provision ................... $2,029
======
</TABLE>
F-9
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 27,
1998 1998
---------- -------------
(IN THOUSANDS)
--------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................... $1,304 $ 948
Research tax credits ................................ 169 92
Compensation accruals ............................... 62 70
Inventory capitalization ............................ 120 130
Bad debt allowance .................................. 56 64
Alternative minimum tax ............................. 261 158
Foreign tax credit .................................. 270 153
State incentive credits ............................. -- 165
------ ------
Total gross deferred tax assets ..................... 2,242 1,780
Less valuation allowance ............................ (290) (167)
------ ------
Net deferred tax asset .............................. 1,952 1,613
Deferred tax liabilities:
Property and equipment, due to depreciation ......... 2,154 2,477
------ ------
Gross deferred tax liabilities ...................... 2,154 2,477
------ ------
Net deferred tax asset (liability) .................. $ (202) $ (864)
====== ======
</TABLE>
The net change in the total valuation allowance for the six months ended
December 27, 1998 was $123,000. The primary reason for the reduction in the
valuation allowance for the six months ended December 27, 1998 was the
implementation of tax strategies to utilize these assets. Realization of
deferred tax assets associated with the NOL carryforwards is dependent upon the
Company generating sufficient taxable income prior to their expiration.
Although realization is not assured for the remaining deferred tax assets,
management believes it is more likely than not that they will be realized
through future taxable earnings. However, the net deferred tax assets could be
reduced in the future if management's estimates of taxable income during the
carryforward period are significantly reduced.
As of December 27, 1998, the Company has net operating loss carryforwards for
federal purposes of $3,493,000 and $2,346,000 for state purposes. The
carryforward expiration period is 2011 to 2013 for Federal tax purposes and
from 2000 to 2003 for state purposes. The Company anticipates that each of
these carryforwards will be utilized by the end of the current fiscal year.
EARNINGS PER SHARE
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards, "Earnings Per Share," ("SFAS 128"). SFAS 128
required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS 128.
F-10
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following computation reconciles the differences between the basic and
diluted presentations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
-------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income ............................................ $ 2,640 $ 5,217
Weighted average common shares ........................ 12,699 12,876
-------- --------
Basic earnings per common share ....................... $ 0.21 $ 0.41
======== ========
Net income ............................................ $ 2,640 $ 5,217
Diluted weighted average common shares:
Common shares outstanding ............................. 12,699 12,876
Dilutive effect of stock options and warrants ......... 823 665
-------- --------
Total diluted weighted average common shares .......... 13,522 13,541
-------- --------
Diluted earnings per common share ..................... $ 0.20 $ 0.39
======== ========
</TABLE>
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. As of
December 27, 1998, there were no potential shares considered to be
antidilutive. For the six months ended December 28, 1997, there were 300,000
shares that were not included in calculating diluted income per share because
their effect was antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No.130, "Reporting Comprehensive Income," ("SFAS 130"), which establishes
standards for reporting and display of Comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all nonowner changes in equity that are excluded
from net income. This Statement has no financial statement impact for an
enterprise that has no items of other comprehensive income in any period
presented. During the six months ended December 28, 1997 and December 27, 1998,
the Company had no items of other comprehensive income.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"). SFAS 131 changes the way public companies report segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial statements to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The application
of the new rules does not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133")
which is required to be adopted in years beginning after June 15, 1999. Because
of the Company's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
July 22, 1998
BOARD OF DIRECTORS AND SHAREHOLDERS
CREE RESEARCH, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity,
present fairly, in all material respects, the financial position of Cree
Research, Inc. and subsidiaries at June 30, 1997 and June 28, 1998, and the
results of their operations and their cash flows for the two years in the
period ended June 30, 1997, and for the year ended June 28, 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
RALEIGH, NORTH CAROLINA
F-12
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 28,
1997 1998
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 10,448 $17,680
Marketable securities ......................................................... -- 657
Accounts receivable, net ...................................................... 7,694 10,479
Inventories ................................................................... 3,949 2,543
Deferred income tax ........................................................... 1,830 1,952
Prepaid expenses and other current assets ..................................... 466 1,347
-------- -------
Total current assets ........................................................ 24,387 34,658
Property and equipment, net ................................................... 24,333 36,476
Patent and license rights, net ................................................ 1,267 1,525
Other assets .................................................................. 150 65
-------- -------
Total assets ................................................................ $ 50,137 $72,724
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ....................................................... $ 2,248 $ 5,595
Current maturities of long term debt .......................................... -- 17
Accrued salaries and wages .................................................... 292 391
Other accrued expenses ........................................................ 834 1,052
-------- -------
Total current liabilities ................................................... 3,374 7,055
Long term liabilities:
Long term debt ................................................................ -- 8,650
Deferred income tax ........................................................... 1,638 2,154
-------- -------
Total long term liabilities ................................................. 1,638 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 2,750 shares authorized; none issued and
outstanding ................................................................. -- --
Common stock, $0.005 par value; 14,500 shares authorized; shares issued and
outstanding 12,523 at June 30, 1997 and 12,989 at June 28, 1998 ............. 62 65
Additional paid-in-capital .................................................... 46,214 49,676
Retained earnings (deficit) ................................................... (1,151) 5,124
-------- -------
Total shareholders' equity .................................................. 45,125 54,865
-------- -------
Total liabilities and shareholders' equity ................................. $ 50,137 $72,724
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Product revenue, net ...................... $ 9,689 $ 19,823 $ 34,891
Contract revenue, net ..................... 3,945 6,535 7,640
License fee income ........................ 1,423 2,615 --
------- -------- --------
Total revenue ............................ 15,057 28,973 42,531
Cost of revenue:
Product revenue, net ...................... 8,411 13,388 21,727
Contract revenue, net ..................... 3,078 5,707 6,252
------- -------- --------
Total cost of revenue .................... 11,489 19,095 27,979
------- -------- --------
Gross profit ................................ 3,568 9,878 14,552
Operating expenses:
Research and development .................. 1,286 1,826 1,774
Sales, general and administrative ......... 2,917 4,301 4,131
Other (income) expense .................... (11) 639 502
------- -------- --------
Income (loss) from operations ............ (624) 3,112 8,145
Interest income, net ........................ 867 607 730
------- -------- --------
Income before income taxes ............... 243 3,719 8,875
Income tax expense .......................... -- 177 2,600
------- -------- --------
Net income ............................... $ 243 $ 3,542 $ 6,275
======= ======== ========
Earnings per share:
Basic .................................. $ 0.02 $ 0.28 $ 0.49
======= ======== ========
Diluted ................................ $ 0.02 $ 0.27 $ 0.47
======= ======== ========
Shares used in per share calculation:
Basic .................................. 11,826 12,455 12,863
======= ======== ========
Diluted ................................ 12,615 13,126 13,493
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
------------- ---------- -----------
<S> <C> <C> <C>
Operating activities:
Net income .......................................................... $ 243 $ 3,542 $ 6,275
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 1,765 3,356 4,217
Loss (gain) on disposal of property and equipment .................. (8) 631 719
Loss on write off of patents ....................................... -- 141 17
Amortization of patent rights ...................................... 126 108 102
Amortization and write off of goodwill ............................. 41 41 86
Purchase of marketable trading securities .......................... -- -- (1,500)
Proceeds from sale of marketable trading securities ................ -- -- 421
Loss on marketable trading securities .............................. -- -- 32
Deferred income taxes .............................................. -- (192) 394
Tax benefits associated with stock options ......................... -- 96 1,791
Changes in assets and liabilities:
Accounts receivable .............................................. (3,258) (891) (2,398)
Inventories ...................................................... (1,549) (723) 1,406
Deferred cost on research contracts .............................. 81 -- --
Prepaid expenses and other assets ................................ 49 (262) (882)
Accounts payable, trade .......................................... 714 (226) 1,092
Accrued expenses ................................................. 160 476 320
---------- -------- ---------
Net cash provided by (used in) operating activities .............. (1,636) 6,097 12,092
---------- -------- ---------
Investing activities:
Maturity of investment securities ................................... 2,124 1,787 --
Purchase of property and equipment .................................. (14,740) (8,115) (15,287)
Proceeds from sale of assets ........................................ 52 13 463
Purchase of patent rights ........................................... (310) (310) (377)
---------- -------- ---------
Net cash used in investing activities ............................ (12,874) (6,625) (15,201)
---------- -------- ---------
Financing activities:
Proceeds from issuance of long-term debt ............................ -- -- 8,667
Net proceeds from issuance of common stock .......................... 20,924 926 2,936
Repurchase of common stock .......................................... -- (112) (1,262)
---------- -------- ---------
Net cash provided by financing activities ........................ 20,924 814 10,341
---------- -------- ---------
Net increase in cash and cash equivalents ............................. 6,414 286 7,232
Cash and cash equivalents:
Beginning of year ................................................... 3,748 10,162 10,448
---------- -------- ---------
End of year ......................................................... $ 10,162 $ 10,448 $ 17,680
========== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized .................. $ 5 $ -- $ 74
========== ======== =========
Cash paid for income taxes .......................................... $ -- $ 300 $ 336
========== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 30, 1996 AND 1997 AND JUNE 28, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED UNEARNED TREASURY SHAREHOLDERS'
PAR VALUE CAPITAL EARNINGS COMPENSATION STOCK EQUITY
----------- ------------ ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 ................. $52 $ 24,427 $ (4,936) $ (2) $ (38) $ 19,503
Common stock options
exercised for cash, 122 shares ......... 1 412 -- -- -- 413
Common stock warrants
exercised for cash, 665 shares ......... 3 2,916 -- -- -- 2,919
Compensation expense
for common stock options ............... -- -- -- 2 -- 2
Proceeds from sale of 1,079 shares
of common stock and 300
common stock warrants,
net of issuance costs of $625 .......... 5 17,587 -- -- -- 17,592
Net income ............................... -- -- 243 -- -- 243
--- -------- -------- ---- -------- --------
Balance at June 30, 1996 ................. 61 45,342 (4,693) -- (38) 40,672
Common stock options exercised
for cash, 52 shares .................... -- 160 -- -- -- 160
Common stock warrants exercised
for cash, 203 shares ................... 1 766 -- -- -- 767
Purchase of common stock for
the treasury, 10 shares ................ -- -- -- -- (112) (112)
Retirement of 20 treasury shares ......... -- (150) -- -- 150 --
Income tax benefits from stock
option exercises ....................... -- 96 -- -- -- 96
Net income ............................... -- -- 3,542 -- -- 3,542
--- -------- -------- ---- -------- --------
Balance at June 30, 1997 ................. 62 46,214 (1,151) -- -- 45,125
Common stock options exercised
for cash, 217 shares ................... 1 1,693 -- -- -- 1,694
Common stock warrants exercised
for cash, 331 shares ................... 2 1,240 -- -- -- 1,242
Purchase of common stock for
the treasury, 82 shares ................ -- -- -- -- (1,262) (1,262)
Retirement of 82 treasury shares ......... -- (1,262) -- -- 1,262 --
Income tax benefits from stock
option exercises ....................... -- 1,791 -- -- -- 1,791
Net income ............................... -- -- 6,275 -- -- 6,275
--- -------- -------- ---- -------- --------
Balance at June 28, 1998 ................. $65 $ 49,676 $ 5,124 $ -- $ -- $ 54,865
=== ======== ======== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree Research, Inc. ("the Company" or "Cree"), a North Carolina corporation,
develops, manufactures and markets silicon carbide-based semiconductor devices.
Revenues are primarily derived from the sale of blue light emitting diodes
("LEDs"), silicon carbide ("SiC") based materials and full-color LED based
electronic displays and modules. The Company markets its blue LED chip products
principally to customers who incorporate them into packaged lamps for resale to
original equipment manufacturers. The Company also sells SiC material products
to corporate, government and university research laboratories. In addition, the
Company is engaged in a variety of research programs related to the advancement
of SiC process technology and the development of electronic devices that take
advantage of SiC's unique physical and electronic properties. These research
projects are primarily funded by Federal government agencies and departments.
The Company recovers the costs of a majority of its research and development
efforts from revenues on these contracts with agencies of the Federal
government.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cree Research,
Inc., and its wholly-owned subsidiaries, Real Color Displays, Inc. ("RCD"),
Cree Research FSC, Inc. and Cree Technologies, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
CHANGE IN FISCAL YEAR
On September 24, 1997, the Board of Directors of Cree Research, Inc. changed
the Company's fiscal year from the twelve months ending June 30, to a 52 or 53
week year ending on the last Sunday in the month of June. Accordingly, all
quarterly reporting reflected a 13 week period in fiscal 1998, except that the
period ended September 28, 1997, which commenced July 1, 1997, reflected the
results of twelve weeks and five days. The Company's 1998 fiscal year extended
for the period from July 1, 1997 to June 28, 1998.
ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at June 30, 1997 and June 28,
1998, and the reported amounts of revenues and expenses during the years ended
June 30, 1996 and 1997 and June 28, 1998. Actual amounts could differ from
those estimates.
REVENUE RECOGNITION
The Company recognizes product revenue at the time of shipment or in accordance
with the terms of the relevant contract. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred. License fee income is recognized when the transfer of licensed
technology is completed.
Contract revenue represents reimbursement by various U.S. Government entities
to aid in the furthering of the development of the Company's technology by
supplementing the Company's research and development efforts. Any resulting
technology obtained by the Company through these efforts remain the property of
the Company after the completion of the contract, subject to certain license
rights obtained by the government. Contract revenue includes funding of direct
research and development costs and a portion of the Company's general and
administrative expenses and other operating expenses for contracts under which
funding is expected to exceed direct costs over the life of the contract. The
specific reimbursement provisions of the contracts, including the portion of
the Company's general and administrative expenses and other operating expenses
that are reimbursed, vary by contract. Such reimbursements are recorded as
contract revenue. For
F-17
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract (i.e., certain cost share
arrangements), the Company reports direct costs as research and development
expenses with related reimbursements recorded as an offset to those expenses.
In September 1996, the Company entered into a license and supply agreement with
Shin-Etsu Handotai Co. LTD. ("Shin-Etsu") and other parties to use certain LED
fabrication technology and has agreed to supply silicon carbide wafers required
to manufacture the licensed product. The license agreement provides for payment
of a license fee and royalties based on a percentage of sales of products made
using the licensed technology. The license fee was payable in installments
which totaled $2,700,000. As of June 28, 1998, all license fees have been
received. The Company also has recorded a short-term accrued expense of
$186,000 payable in the first quarter of fiscal 1999 to the third party that
brokered the license agreement. Substantially all of the Company's obligations
to transfer the licensed technology were performed during fiscal 1997, and the
net present value of the license fee payments and commission were recognized.
In October 1995, the Company also entered into an agreement to license its
technology for the joint development and manufacture of LEDs using Cree's
technology to Siemens AG License fees are payable in installments totaling
$1,500,000. As of June 28, 1998, all fees have been received. The Company's
obligation to transfer the licensed technology was substantially completed
during fiscal 1996, and the net present value of the license fee payments was
recorded as revenue at that time.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
MARKETABLE SECURITIES
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires certain securities to
be classified into three categories:
(a) Securities Held-to-Maturity -- Debt securities that the entity has
the positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are reported
at fair value, with unrealized gains and losses included in earnings.
(c) Securities Available-for-Sale -- Debt and equity securities not
classified as either securities held-to-maturity or trading securities are
reported at fair value with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders' equity.
The Company's short-term investments are comprised of equity securities that
are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at June 28, 1998, with net
realized and unrealized gains and losses included in net earnings.
As of June 28, 1998, short-term investments consist of common stock holdings in
C3 a portion of which were purchased in November 1997. The Company's CEO has,
through a binding agreement, promised to indemnify the Company for losses of up
to $300,000, plus the lesser of $100,000 or the net difference between the per
share selling price and $9.375 per share for all shares of C3 common stock sold
by Cree. This indemnity covers losses that may result from the sale of shares
purchased in November 1997 below the purchase price paid, offset by gains
realized on shares acquired directly from C3 in January 1997 (see below).
Payment of this obligation is due within ten days after receipt by the CEO of
the Company's written
F-18
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demand made pursuant to a vote of the majority of the members of the Board of
Directors. At June 28, 1998, the Company had recorded a $390,000 receivable
from the CEO (included in net accounts receivable) based upon this agreement
for the net realized and unrealized losses on this investment. Realized losses
on shares of C3 stock sold by the Company during fiscal 1998 totaled $254,000,
and unrealized losses offset by the unrealized gain on shares acquired from C3
directly (see below) were $168,000 at June 28, 1998. Approximately $32,000 of
losses on the investment in C3 stock is included in other income (expense) for
fiscal 1998.
In addition to the shares of C3 purchased in November 1997, the Company
acquired 24,601 shares of C3 common stock in January 1997. These shares were
issued pursuant to an option C3 granted to the Company in 1995. The option gave
the Company the right to acquire, for an aggregate consideration of $500, one
percent of the outstanding common stock of C3. C3 retained the right to waive
the consideration and issue the stock at any time, which it elected to do in
January 1997. The shares issued pursuant to the option are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933,
which permits the sale of such securities without registration if certain
conditions are met. The shares first became eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined under the first-in, first-out (FIFO) method. Inventories consists of
the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 28,
1997 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ............ $1,559 $ 999
Work-in-progress ......... 1,374 752
Finished goods ........... 1,016 792
------ ------
$3,949 $2,543
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
20 years. Leasehold improvements are amortized over the life of the related
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and related accumulated
depreciation of the assets are removed from the accounts upon disposition and
any resulting gain or loss is reflected in operations.
During the first quarter of fiscal 1996, the Company changed its previous
estimate on the useful lives of some of its manufacturing equipment from five
to nine years. The change in estimate was based on the Company's experience
with similar fixed assets. The net adjustment increased net income
approximately $280,000, or $0.02 per share, for fiscal 1996.
The Company has entered into an agreement with C3 to sell crystal growth
equipment manufactured by the Company to C3 at cost plus a reasonable overhead
allocation. As a result of this transaction, the Company has recognized the
overhead allocation as "other operating income."
In November 1997, the Company purchased real property consisting of
approximately 30 acres of land with a production facility of approximately
139,000 square feet and a total of approximately 33,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price of the land and
buildings was $3,000,000. The Company moved
F-19
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
most of its sales and administrative personnel to this facility in January
1998. The Company anticipates it will relocate several other operations to this
facility over the next few quarters. All areas, with the exception of certain
crystal growth and wafer fabrication assets, are expected to relocate during
fiscal 1999.
The Company assesses the realizability of the carrying value of its investment
in property and equipment whenever events or changes in circumstance indicate
that an impairment may have occurred in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for Impairment of Long Lived Assets and Assets to be Disposed of."
As of June 28, 1998, the Company has not recorded any impairment in the
carrying value of its property and equipment.
PATENT AND LICENSE RIGHTS
Patent rights reflect costs incurred to enhance and maintain the Company's
intellectual property position. License rights reflect costs incurred to use
the intellectual property of others. Both are amortized on a straight line
basis. During fiscal 1997, the Company changed its previous estimate of the
useful lives of patents from 17 years beginning at the date of patent issue to
20 years from the date of patent application to conform to a legislative
amendment made to the U.S. patent laws which became effective in June 1995.
This change in estimate had no material impact to net income or earnings per
share, since the average period of time between patent application and issue is
generally about three years. Amortization expense was $126,000, $108,000 and
$102,000, for the years ended June 30, 1996 and 1997 and June 28, 1998,
respectively. Total accumulated amortization for patents was approximately
$460,000 and $560,000 at June 30, 1997 and June 28, 1998, respectively.
GOODWILL
Goodwill represented the amount by which the costs to acquire the net assets of
the Real Color Displays subsidiary exceeded their related fair value at
acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998.
As required by generally accepted accounting principles, this charge was
included in the results of operations.
RESEARCH AND DEVELOPMENT POLICY
The Company partners with the Federal government in many of its current
research and development efforts. By entering into contracts, the Company has
most of its research and product development costs funded by the U.S.
Government. The contract funding may be based on a cost-plus or a cost-share
arrangement. Pursuant to each contract, the amount of funding is determined
based on cost estimates that include direct costs, plus an allocation for
research and development, general and administrative and a cost of capital
expense. Cost-plus funding is determined based on actual costs plus a set
percentage margin. For the cost-share contracts, the actual costs are divided
between the U.S. Government and the Company based on the terms of the contract.
The government's cost share is then funded to the Company. Activities performed
under both of these arrangements include research regarding silicon carbide and
gallium nitride materials. The contracts typically require the submission of a
written report that documents the results of such research.
Funding on contracts under which the Company anticipates that funding will
exceed direct costs over the life of the contract is recorded as contract
revenue and related costs are reported as a cost of contract revenue. For
contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, direct costs are shown as
research and development expenses and related funding as an offset of those
expenses. The following table details information about contracts for which
direct expenses exceed funding by period as reflected in the statements of
operations:
F-20
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net research and development costs ......... $ 368 $ 671 $276
Government funding ......................... 1,918 2,186 601
------ ------ ----
Total direct costs incurred ............. $2,286 $2,857 $877
====== ====== ====
</TABLE>
As of June 28, 1998, all funding under contracts where the Company anticipates
that direct costs will exceed amounts to be funded has been exhausted.
Therefore, the Company anticipates that all future funding under existing
contracts will be reflected as contract revenue while direct costs will be
reported as contract cost of revenue.
INTEREST CAPITALIZATION
During the year ended June 28, 1998, the Company capitalized interest on funds
used to construct property, plant and equipment in connection with the newly
acquired facility. Interest capitalized during fiscal 1998 was $128,000.
CREDIT RISK, MAJOR CUSTOMERS AND MAJOR SUPPLIERS
Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash equivalents and accounts receivable.
The Company's cash equivalents consist of U.S. Treasury bills, government
agency bonds and commercial paper. Certain bank deposits may at times be in
excess of the FDIC insurance limit.
The Company sells its products to manufacturers and researchers worldwide and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses, in the aggregate, have generally been within
management's expectations. The Company presently derives primarily all of its
contract revenues from contracts with the U.S. Department of Defense.
Approximately 33% and 18%, respectively, of the Company's accounts receivable
balance at June 30, 1997 and June 28, 1998 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens totaling 19% and
37%, of accounts receivable balances at June 30, 1997 and June 28, 1998,
respectively, and amounts due from C3 totaling 1% and 23%, of accounts
receivable balances at June 30, 1997 and June 28, 1998, respectively.
The Company has derived its product revenue from sales primarily in the United
States, the Far East and Europe as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
United States ......... 31% 21% 26%
Far East .............. 27% 33% 15%
Europe ................ 38% 44% 58%
Other ................. 4% 2% 1%
</TABLE>
One customer accounted for 46% and 51% of product revenue for fiscal 1997 and
1998, respectively. Another customer accounted for 2% and 13% of product
revenue for fiscal 1997 and 1998, respectively. In addition, two customers
accounted for 32% of product revenue in fiscal 1996. The Department of Defense
accounted for 97%, 99% and 93% of contract revenues during fiscal 1996, 1997
and 1998, respectively.
F-21
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.
PER SHARE DATA
Basic earnings per common share is computed using the weighted average number
of shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
Incremental shares of 789,000, 670,000 and 631,000 in 1996, 1997 and 1998,
respectively, were used in the calculation of diluted earnings per common
share.
ACCOUNTING FOR STOCK BASED COMPENSATION
In accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, no compensation is recorded for stock options or
other stock-based awards that are granted to employees with an exercise price
equal to or above the common stock price on the grant date. Compensation
related to performance share grants is recognized from the grant date until the
performance conditions are satisfied, based on the market price of the
Company's common stock.
In October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("FAS 123"), "Accounting for Stock Based Compensation." This
Statement establishes fair value as the measurement basis for equity
instruments issued in exchange for goods or services and stock-based
compensation plans. Fair value may be measured using quoted market prices,
option-pricing models or other reasonable estimation methods. FAS 123 permits
the Company to choose between adoption of the fair value based method or
disclosing pro forma net income information. The Statement is effective for
transactions entered into after December 31, 1995. The Company will continue to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, as amended, and provide only the pro forma disclosures
required by FAS 123.
3. ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 28, 1998
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Trade receivables ....................... $5,210 $ 8,971
Other short term receivables ............ 2,700 1,659
------ -------
7,910 10,630
Allowance for doubtful accounts ......... 216 151
------ -------
Current receivables ..................... 7,694 10,479
Long term receivables ................... 54 56
------ -------
Total accounts receivable ............ $7,748 $10,535
====== =======
</TABLE>
F-22
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 30, 1996 and 1997, and June 28,
1998:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO DEDUCTIONS BALANCE AT
YEARS BEGINNING COST AND (WRITE-OFFS END OF
ENDED OF PERIOD EXPENSES CHARGED TO RESERVE) PERIOD
- -------------------------- ------------ ------------ --------------------- -----------
<S> <C> <C> <C> <C>
June 30, 1996 ......... $ 22 203 (175) $ 50
June 30, 1997 ......... $ 50 190 (24) $216
June 28, 1998 ......... $216 50 (115) $151
</TABLE>
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 28, 1998
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Office equipment and furnishings .................. $ 909 $ 1,372
Land and buildings ................................ -- 3,501
Machinery and equipment ........................... 22,312 28,136
Construction in progress .......................... 2,669 9,074
Leasehold improvements ............................ 5,420 4,697
-------- ---------
31,310 46,780
Accumulated depreciation and amortization ......... (6,977) (10,304)
-------- ---------
Total property and equipment ................... $ 24,333 $ 36,476
======== =========
</TABLE>
Depreciation and amortization of property and equipment totaled $1,765,000,
$3,356,000, and $4,217,000 for the year ended June 30, 1996 and 1997, and June
28, 1998, respectively.
5. SHAREHOLDERS' EQUITY
The Board of Directors is authorized to issue 1,250,000 and 1,500,000 shares of
Class A Voting and Class B Non-Voting preferred stock, respectively, each with
a par value of $0.01 per share, at its discretion. This preferred stock may be
issued in one or more series with the number of shares, designation, relative
rights, preferences and limitations to be determined by resolution of the Board
of Directors.
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by FAS 123, "Accounting For Stock-Based Compensation," the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and amendments in
accounting for its employee stock option plans.
The Company's Amended and Restated Equity Compensation Plan has authorized the
grant of options for up to 2,540,000 shares of the Company's common stock. All
options granted have ten year terms and vest and become fully exercisable
within five years. The Company had granted 96,000 options with a ten year term
for shares of the Company's common stock under the Stock Option Plan for
Non-Employee Directors (Directors Formula Plan). This Plan was terminated in
November 1997 and all 96,000 options granted under this plan are now fully
vested. The Company's current stock plans provide for grants of options with
exercise prices equal to or exceeding fair market value on the date of grant.
F-23
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of the Statement. The
fair value of these options was estimated at the date of grant using a Black-
Scholes option pricing model with weighted average risk free rates of interest
of 6.7% and 5.6%, for the years ended June 30, 1997 and June 28, 1998,
respectively. The volatility factor of the expected market price of the
Company's common stock is .748 and the weighted-average expected life of the
options was seven years for executives and directors and five years for other
employees.
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income, as reported ............................... $ 243 $ 3,542 $ 6,275
====== ======= =======
Pro forma net income, as adjusted for FAS 123 ......... $ 243 $ 1,418 $ 4,405
====== ======= =======
Pro forma earnings per share:
Basic .............................................. $ 0.02 $ 0.11 $ 0.34
====== ======= =======
Diluted ............................................ $ 0.02 $ 0.11 $ 0.33
====== ======= =======
</TABLE>
The following table details the number of stock options outstanding and their
related exercise prices as of June 28, 1998:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS OUTSTANDING AS OF JUNE 28,
1998
- ----------------------------------------------
EXERCISE NUMBER OF WEIGHTED-AVERAGE
PRICE OPTIONS CONTRACTUAL LIFE
- ------------ ----------- -----------------
<S> <C> <C>
$ 0.42 5,497 2 years
$ 3.13 8,000 6 years
$ 3.63 250,200 5 years
$ 3.75 13,317 3 years
$ 4.00 78,700 6 years
$ 4.38 6,000 6 years
$ 6.82 6,700 5 years
$ 7.38 6,000 6 years
$ 9.38 26,600 9 years
$ 10.25 14,500 9 years
$ 11.19 16,800 8 years
$ 12.98 409,100 9 years
$ 14.38 203,400 7 years
$ 15.75 48,000 8 years
$ 16.38 43,500 10 years
$ 17.75 19,000 10 years
$ 18.75 40,000 9 years
$ 19.38 10,000 10 years
-------
1,205,314
=========
</TABLE>
F-24
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL OPTION ACTIVITY
-----------------------------------------------------------------------
JUNE 30, 1996 JUNE 30, 1997 JUNE 28, 1998
---------------------- ---------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year ......... 769 $ 4.23 632 $ 4.39 927 $ 4.76
Granted .................................. -- $ -- 381 $ 13.56 542 $ 13.98
Exercised ................................ 122 $ 3.39 52 $ 3.08 217 $ 7.80
Forfeited ................................ 15 $ 4.36 34 $ 8.05 47 $ 8.67
--- --- ---
Outstanding -- end of year ............... 632 $ 4.39 927 $ 4.76 1,205 $ 10.19
Exercisable at end of year ............... 439 $ 3.78 702 $ 7.44 599 $ 8.40
</TABLE>
During fiscal year 1992, the Company issued stock warrants to purchasers of
Class B Non-Voting preferred stock, Series C. The warrants entitled the holders
to purchase 607,320 shares of common stock at $3.75 per share. In September
1992, the Company issued stock warrants to additional purchasers of Class B
Non-Voting preferred stock, Series C. The warrants entitled the holders to
purchase 363,644 shares of common stock at $4.13 per share. Warrants to
purchase 425,642, 202,996 and 331,326 shares of common stock were exercised
during the years ended June 30, 1996 and 1997, and June 28, 1998, respectively.
All remaining warrants expired effective February 8, 1998.
In connection with the Company's September 1995 private placement, the Company
issued an additional 300,000 warrants, which have an exercise price of $27.23
and expire September 2000. As of June 28, 1998, all of these warrants remain
outstanding and represent the only warrants outstanding.
7. COMMITMENTS
The Company currently leases three facilities under four separate lease
agreements. These facilities are comprised of both office and manufacturing
space. The first facility has a remaining lease period of approximately three
and one half years for a multi-suite block. Effective May 1, 1998, the Company
has notified the lessor of its intention to exercise a right to terminate for
all suites with the exception of the base suite. This right to terminate will
be effective May 1, 1999. Also associated with this facility is a sublease
agreement entered into in fiscal 1996 to lease an adjacent 1,900 square feet.
That sublease expires in October 1998 and will not be renewed. The lease term
for the second facility began in September 1995. This facility has a remaining
lease period of approximately two years with two options to renew for a total
of four additional years. All of these agreements provide for rental
adjustments for increases in property taxes, the consumer price index and
general property maintenance.
Rent expense associated with these leases totaled $388,000, $549,000 and
$522,000 for the years ended June 30, 1996 and 1997, and June 28, 1998,
respectively. Future minimum rentals as of June 28, 1998 under these leases are
as follows:
<TABLE>
<CAPTION>
MINIMAL RENTAL
YEARS ENDED AMOUNT
- ------------------- ---------------
(IN THOUSANDS)
<S> <C>
1999 ........... $ 389
2000 ........... 334
2001 ........... 284
2002 ........... 138
------
Total ........... $1,145
======
</TABLE>
F-25
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
In November 1997, the Company entered into a term loan from a commercial bank
for up to $10,000,000 to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $2,950,000 was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds expected to be disbursed on a monthly basis based on actual
expenditures incurred. Draws under the loan agreement may be made during the
eighteen month period ending in May 1999. The loan, which is collateralized by
the purchased property and subsequent upfits, accrues interest at a fixed rate
of 8% and carries customary covenants, including the maintenance of a minimum
tangible net worth and other requirements. Accrued interest is due monthly
through May 1999, at which time the outstanding principal balance will be
amortized over twenty years until 2011, when the loan balance becomes due. At
June 28, 1998, short term and long term borrowings associated with this loan
were $17,000 and $8,650,000, respectively, leaving $1,333,000 unused and
available.
The aggregate maturities for long-term debt for the five years after June 28,
1998 are:
<TABLE>
<CAPTION>
AMOUNT
YEARS ENDED DUE
- ----------------------- ---------------
(IN THOUSANDS)
<S> <C>
1999 ............... $ 17
2000 ............... 213
2001 ............... 230
2002 ............... 250
2003 ............... 270
Thereafter ......... 7,687
------
Total ............. $8,667
======
</TABLE>
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of FAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under FAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The actual income tax expense attributable to earnings for the years ended June
30, 1996 and 1997, and June 28, 1998 differed from the amounts computed by
applying the U.S. federal tax rate of 34 percent to pretax earnings as a result
of the following:
F-26
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision at statutory rate (34%) ......... $ 83 $ 1,265 $3,018
State tax provision .......................................... 36 193 166
Decrease in income tax expense resulting from:
Foreign sales corporation ................................... -- -- (214)
Decrease in valuation allowance ............................. (106) (1,279) (358)
Other ....................................................... (13) (2) (12)
------ ---------- ------
Income tax expense ........................................... $ -- $ 177 $2,600
====== ========= ======
</TABLE>
The following are the components of the provision for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------
JUNE 30, JUNE 28,
1997 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal ......................... $ 54 $ 699
Foreign tax withholding ......... 220 50
State ........................... 95 269
------ ------
369 1,018
Deferred:
Federal ......................... (442) 1,582
State ........................... 250 --
------ ------
(192) 1,582
------ ------
Net provision .................... $ 177 $2,600
====== ======
</TABLE>
There is no tax provision for fiscal 1996.
F-27
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 28,
1997 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................... $ 2,413 $1,304
Research tax credits ................................ 157 169
Compensation ........................................ 115 62
Inventory ........................................... 199 120
Bad debt ............................................ 84 56
Goodwill ............................................ 31 --
Alternative minimum tax ............................. 64 261
Foreign tax credit .................................. 220 270
Other ............................................... 10 --
-------- ------
Total gross deferred tax assets ..................... 3,293 2,242
Less valuation allowance ............................ (1,463) (290)
-------- ------
Net deferred tax asset .............................. 1,830 1,952
Deferred tax liabilities:
Property and equipment, due to depreciation ......... 1,638 2,154
-------- ------
Gross deferred tax liabilities ...................... 1,638 2,154
-------- ------
Net deferred tax asset (liability) .................. $ 192 $ (202)
======== ======
</TABLE>
The net change in the total valuation allowance for the years ended June 30,
1997 and June 28, 1998 was $1,201,000 and $1,173,000, respectively. Included in
the valuation allowance is $815,000 and $0, respectively, for 1997 and 1998 to
offset net operating losses ("NOL") generated by the exercise of stock options.
The reduction in the valuation allowance does not impact the 1998 tax provision
as such taxes are reflected in additional paid in capital. The primary reason
for the reduction in the valuation allowance in 1997 and 1998 was the greater
likelihood of the utilization of future tax benefits from net operating loss
carryforwards. Realization of deferred tax assets associated with the NOL
carryforwards is dependent upon the Company generating sufficient taxable
income prior to their expiration. Management believes that there is a risk that
certain of the state NOL carryforwards may expire unused and, accordingly, has
established a valuation allowance against them. Although realization is not
assured for the remaining deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable earnings.
However, the net deferred tax assets could be reduced in the future if
management's estimates of taxable income during the carryforward period are
significantly reduced.
As of June 28, 1998, the Company has net operating loss carryforwards for
Federal purposes of $3,493,000 and $2,346,000 for state purposes. The
carryforward expiration period is 2011 to 2013 for Federal tax purposes and
from 2000 to 2003 for state purposes.
10. ACQUISITION
In August 1994, the Company formed a North Carolina wholly-owned subsidiary,
RCD, to develop and market full color LED displays. Subsequently, RCD acquired
the net assets of Color Cells International, Ltd., a Hong-Kong based company in
this line of business, for cash consideration of $215,000 and assumption of
$152,000 of liabilities. The terms of the acquisition called for an "Earn-Out
Payment" based on calculated net profits, payable half in cash and half in Cree
common stock. Earn-Out Payments were subject to certain
F-28
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limitations concerning the timing (calculation based on certain eligible
shipments through September 1997) and amount (maximum payments of $1.8 million)
of any such payments. As of the end of the earn-out period in September 1997,
no amounts had been earned or paid under this agreement.
11. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "Plan") pursuant to Section
401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar
amount of retirement benefits, and actual benefits received by employees will
depend on the amount of each employee's account balance at the time of
retirement. All employees are eligible to participate under the Plan on the
first day of a new fiscal quarter after date of hire. The Plan is not insured
by the Pension Benefit Guaranty Corporation.
The Company may, at its discretion, make contributions to the Plan. However,
the Company did not make any contributions to the Plan during the years ended
June 30, 1996, 1997 or June 28, 1998.
12. CONTINGENCIES
The consolidated securities class action lawsuits previously pending against
the Company and certain of its directors and officers in the U.S. District
Court for the Middle District of North Carolina were dismissed with prejudice
on November 28, 1997. The dismissal was pursuant to a stipulation of the named
parties entered after the court granted the defendant's motions to dismiss the
consolidated complaint for failure to state a claim. No payments were made to
the plaintiffs to obtain the dismissal. By stipulating to the dismissal with
prejudice, the plaintiffs waived any right to re-file the action or to appeal
the court's order of dismissal.
13. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," as of December 28, 1997. SFAS No. 128 required the
Company to change its method of computing, presenting and disclosing earnings
per share information. All prior period data presented has been restated to
conform to the provisions of SFAS No. 128.
The following computation reconciles the differences between the basic and
diluted presentations:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
JUNE 30, JUNE 30, JUNE 28,
1996 1997 1998
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic:
Net income ............................................ $ 243 $ 3,542 $ 6,275
======== ======== ========
Weighted average common shares ........................ 11,826 12,455 12,863
======== ======== ========
Basic income per common share ......................... $ 0.02 $ 0.28 $ 0.49
======== ======== ========
Diluted:
Net income ............................................ $ 243 $ 3,542 $ 6,275
======== ======== ========
Weighted average shares:
Common shares outstanding ............................. 11,826 12,455 12,863
Dilutive effect of stock options and warrants ......... 789 670 631
-------- -------- --------
Total shares and common share equivalents ............. 12,615 13,126 13,493
======== ======== ========
Diluted income per common share ....................... $ 0.02 $ 0.27 $ 0.47
======== ======== ========
</TABLE>
F-29
<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS No. 130") for the year ended June 27,
1999. SFAS No. 130 requires the Company to display an amount representing total
comprehensive income for the period in a financial statement which is displayed
with the same prominence as other financial statements. Upon adoption, all
prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The application of the new pronouncement is not expected to have
a material impact on the Company's financial statements.
The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") for the year ended June 27, 1999. SFAS No. 131 requires the Company
to report selected information about operating segments in its financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The application of
the new pronouncement is not expected to have a material impact on the
Company's disclosures.
F-30
<PAGE>
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<PAGE>
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<PAGE>
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(CREE logo)
CIBC OPPENHEIMER ----------
CREE RESEARCH, INC. ----------
1,300,000 SHARES PRUDENTIAL SECURITIES ----------
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COMMON STOCK
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MORGAN KEEGAN & COMPANY, INC.
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PROSPECTUS ----------
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February 10, 1999 ----------
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO
DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS
NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
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